Stress in the euro area financial system remains low, but the operating environment for financial firms is still challenging, according to a new report from the European Central Bank (ECB) released on Thursday.

Systemic stress in the euro area has remained low over the past six months, amid “improving, but still subdued, economic growth,” the report says, noting that fears of deflation harming both price and financial stability have abated.

In this environment, economic risk-taking in the euro area is still lagging, and the recovery remains weak, the ECB says.

“Despite these signs of improving economic conditions, the risk of continuing low nominal growth remains a challenge to financial stability in the euro area,” it says.

Another key source of possible risk originates from financial institutions, including banks, insurers, and, increasingly, the shadow banking sector.

“Bank profitability remains weak and the return on equity remains below the cost of capital for many banks,” the report says, adding that, “Large banks have become less confident about their ability to make markets during periods of stress.”

Insurers are enjoying solid profitability, the report says, although “the low-yield environment is testing their traditional reliance on fixed income assets as a means of generating portfolio returns.”

In addition, the shadow banking sector continues to grow robustly, increasing the potential for systemic risks, the report says.

In fact, the bank singles out four main risks to financial stability over the next 18 months, including the risks posed by a rapidly growing shadow banking sector; and, the prospect of weak profitability for banks and insurers.

The other main threats, it says, are: an abrupt increase in global risk premia, amplified by low secondary market liquidity; and, an increase in debt sustainability concerns in the sovereign and corporate sectors.