ECB says financial stability risks 'elevated', notes 'exuberance' in crypto-assets

Those risks were made worse by the fact that the countries most affected by the pandemic were in many cases those with already higher vulnerabilities, the ECB added in its May SFR.

While corporate insolvencies were at historic lows, "considerably higher" rates of bankruptcy could not be ruled out, particularly in certain euro area countries as economic support measures were withdrawn.

"We are optimistic that financial and economic conditions will bounce back," ECB Vice President Luis de Guindos said in the report.

"There is, however, a reality that the pandemic will leave a legacy of higher debt and weaker balance sheets, which - if unaddressed - could prompt sharp market corrections and financial stress or lead to a prolonged period of weak economic recovery."

Rallies in financial markets and higher prices in real estate markets had also led to concerns about the potential for "abrupt asset price corrections", the ECB observed.

Among other risks, the central bank said that "spillovers" from a repricing in the US equity market could be "substantial", with a 10% correction on Wall Street potentially tightening euro area financial conditions by a third of what was seen after the pandemic hit in March 2020.

De Guindos also noted the "uncertainty" around the balance of loan losses at euro area lenders and the provisions already booked.

"Exhuberance" in crypto-assets was also highlighted in the ECB, which pointed out that the surge in its price had already eclipsed those seen in proveious bubbles, including the 'tulip mania' and South Sea Bubble seen in the 17th and 18th centuries.