The European Central Bank published its November 2025 Financial Stability Review, warning that lingering uncertainty around trade agreements and the longer-term effects of tariffs continues to shape euro area financial stability risks. It highlights vulnerability to abrupt asset price adjustments amid high valuations and increasing equity market concentration, while noting that the euro area banking sector remains resilient with strong profitability and ample capital and liquidity buffers. The review points to a combination of tight credit spreads and record-high global equity markets as conditions that could reverse quickly if growth prospects deteriorate or if expectations around artificial intelligence adoption disappoint. It identifies liquidity mismatches in open-ended investment funds, pockets of high leverage among hedge funds and opacity in private markets as potential amplifiers of stress, and warns that concerns about stretched public finances in some advanced economies could create strains in global bond markets that spill over through capital flow shifts, currency swings and changes in euro area funding costs. For the euro area, it notes medium-term sovereign balance sheet pressures from higher issuance needs and funding costs linked to fiscal expansion including defence spending and persistent structural challenges, alongside vulnerabilities in tariff-sensitive corporates and potential household debt-servicing pressure if layoffs materialise. For banks, it flags credit risk exposures to tariff-sensitive firms and growing funding interlinkages with non-banks as potential sources of strain under stress. On policy, the ECB argues that macroprudential authorities should maintain existing capital buffer requirements and borrower-based measures to preserve sound lending standards, and calls for a comprehensive set of measures to increase the resilience of non-bank financial intermediation given its growing footprint and interconnectedness with the banking sector.

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