The risk of a drop in asset prices is on the rise, warns the European Central Bank (ECB) in its biannual financial stability review.

In a report published on Wednesday, the ECB notes the possibility of an “abrupt rise in global risk premia has become more pronounced” over the past six months.

“Misaligned asset prices are a key vulnerability in that they could potentially lead, at some point, to sharp adjustments of risk premia,” the ECB report says. There’s also a risk that any correction could be amplified by low secondary market liquidity, the report warns. That said, the ECB report also notes that signs of broad-based overvaluation is not evident in the euro area.

One of the central risks facing the financial system stems from the health of emerging markets, the ECB report suggests. “As large emerging market economies have grown in their share of global economic output and financial market activity, so too has their role as drivers of global confidence,” the ECB report says.

So, a significant slowdown in emerging market growth could trigger a drop in asset prices in these economies, undermining global market confidence. And, the ECB reports that exposure to emerging markets has been gradually increasing in the investment fund industry.

The ECB report notes that direct exposure to emerging markets for European banks is limited; and that the banking system has seen its shock-absorbing capacity increase in the first half of the year. “Both profitability and solvency positions of banks have improved,” it says. “Challenges that euro area banks still face include a weak macroeconomic recovery, low profitability and a large stock of non-performing loans.”

Sovereign and private sector debt also remains high in several European countries, the ECB report says. “These factors continue to constrain banks’ lending capacity and ability to build up further capital buffers,” it says.

Looking ahead, the ECB report says that banks and insurers “may need to further adjust their business models to cope with persistently weak economic conditions, along with an environment of historically low interest rates.”

The ECB report says that risks are also probably building up in the so-called shadow banks. “The shadow banking sector continues to expand robustly at the global and euro area level. Vulnerabilities are likely to be accumulating below the surface as investment funds take more risk on their balance sheets,” it says.