Eurozone financial sector stress has fallen to levels not seen since before the global financial crisis began in 2007, but the sector remains fragile, the European Central Bank said on Wednesday.

In its semi-annual Financial Stability Review, the ECB said the key risks to eurozone financial stability are economic and financial shocks, tensions in government debt markets, global financial market turbulence and bank funding challenges in the eurozone periphery.

"Indicators measuring systemic stress have fallen back to close to their pre-crisis levels," the ECB said in the report.

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"Stress indicators and euro area fundamentals suggest alleviation of financial market tensions, especially on the banks' funding side."

Data published separately on the ECB's Internet site showed that the systemic stress indicator hit in late September its lowest level in the euro era and has remained close to those levels since.

But the central bank said that with a crunch period of bank funding approaching, risks of banks cutting their balance sheets are increasing.

"With sizeable amounts of bank debt maturing over the coming months, persistently high funding costs for a set of challenged banks could amplify pressures for deleveraging of a disorderly nature — with an associated negative impact on economic welfare and growth."

BANKING UNION

The ECB also pushed countries for continuing reforms to improve competitiveness and construction of the eurozone banking union.

"Further steps towards a genuine euro area banking union would durably address fragmentation," the ECB said.

Also, European countries have to install a credible system of guarantees if banking troubles lead to the need for funds.

"Further steps are needed to clarify backstops for financial sector distress — be they public or private — at the national or European level," the ECB said, and added that after the first two pillars of the banking union have been completed, a common deposit guarantee system should be put on the agenda.

Turning to the global economy, the ECB said that risks of weaker-than-expected recovery outweigh those of better development.

"The global recovery remains muted and uneven across countries and regions ... Risks are clearly tilted to the downside," the report said.

Housing prices are also a concern to financial stability, the ECB said. It added that the outlook for euro area property markets remains weak, with potential further price falls in some countries.

Real property is overvalued in some countries in the eurozone core, the ECB said. In Belgium, Finland and France, both residential and commercial property are seen as overvalued, the ECB said, and added that there was "strong overvaluation" of housing prices in some German cities.

"The outlook for euro area property markets remains weak," the ECB said.

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