The financial system is proving resilient despite emerging market woes and financial market volatility, European regulators say. However, they remain concerned about risks in the banking and investment fund sectors.

Systemic stress has been “contained”, says the European Central Bank in its latest review of financial stability, despite episodes of turbulence in global financial markets. “Bank, financial and sovereign stress all stood at low levels in early May,” the review says.

However, looking ahead, the ECB warns of risk of further financial stress, “possibly triggered by vulnerabilities stemming from emerging markets and low commodity prices.”

The ECB also points to several other systemic risks to financial stability that could develop over the next two years, including weak profitability among banks and insurers; rising concerns about debt sustainability “amid heightened political uncertainty and low nominal growth,” and the prospect of stress in the investment fund sector “amplified by liquidity risks and spillovers to the broader financial system”.

Although financial institutions have made progress in strengthening their balance sheets, the ECB says that cyclical and structural challenges remain. “Cyclical challenges relate to the subdued economic recovery, while structural challenges relate to high operating costs and a large stock of non-performing loans,” the ECB review says.

Additionally, the central bank notes that political risks have “increased considerably” in recent years. “Higher political uncertainty may further delay structural reforms and possibly exert renewed pressure on more vulnerable sovereigns,” the ECB review says.