Levels of financial "stress" in the euro zone have fallen close to levels last seen before the global economic crisis started in 2007, the European Central Bank (ECB) said on Wednesday.
In its biannual Financial Stability Review (FSR) of financial sector risks, the ECB said tension in financial markets had alleviated, but that conditions remained fragile and the euro zone "adjustment process" was incomplete.
"Financial stability has improved in the euro area since our latest issue of the FSR... there is a very low level of systemic risk right now," said ECB Vice-President Vítor Constancio, speaking at a news conference in Frankfurt at 2 p.m. London time.
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However Constancio warned that while the see-sawing markets of the past three years are a thing of the past, risks remained to financial stability. Among the factors the ECB is keeping an eye on are: renewed tension in sovereign debt markets, global financial market turbulence with asset mispricing and low market liquidity, and bank funding challenges that could force excessive deleveraging.
"There are still risks and vulnerabilities… in spite of the fact that stressed countries have undertaken a huge adjustment, particularly with regards to their external accounts, which showed at the beginning of the crisis very big deficits in the case of some countries," said Constancio.
In an interview with CNBC, Constancio said he would be concerned if sovereign bond yields rose sharply again, but added that the proportion of sovereign debt on bank balance sheets was overestimated.
"The total weight of sovereign debt on the balance sheet of banks is not so high as many people think. On average it is just 5 percent of total assets... It is certainly less than many people think, the dependence on sovereign debt," he told CNBC, before noting that bank holdings of government debt were highest in Italy and Spain.
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The ECB has published the FSR since 2004, with the intention of highlighting potential sources of future crises. It is based on a sample of over 90 banks.
—By CNBC's Katy Barnato