ECB: eurozone home prices could see 'disorderly' fall

The ECB has been raising interest rates since July to fight inflation.

Despite the collapse of several US banks and the crisis at Credit Suisse, banks in the eurozone have "proved resilient," according to ECB vice president Luis de Guindos. He stated on Wednesday that these events served as a "powerful reminder of the importance of ensuring that banking system fundamentals are sound."

But the report warned that higher borrowing costs are increasing the risk of loan default among businesses and households, increasing the credit risk for banks and other lenders, as weak growth and high inflation have already triggered a rise in insolvencies.

Despite these concerns, the report suggested that the risk of a broader financial crisis remains "contained," as European bank earnings reached a 15-year high last year. Higher rates have boosted income, but the report indicated that banks may need to "set aside more funds to cover losses and manage their credit risks."

And the impact of the steepest interest rate increase in the ECB's history is beginning to be felt in other sectors. Demand for loans has decreased among businesses and consumers, as well as in the commercial real estate sector.

Transactions have dropped 30 percent, which in turn is slowing property price growth. A further fall in prices could "become disorderly" especially in countries where variable-rate mortgages predominate, the ECB wrote.

The proportion of mortgages with a variable rate is highest in the Baltic countries, Spain and Portugal. Regions where institutional investors have made large investments, like Berlin and Paris, could also prove vulnerable if capital is suddenly withdrawn during a financial downturn.

The resilience of euro area banks shown so far is "largely attributable to the strength of their capital and liquidity buffers," said de Guindos, adding that EU banks are "under stringent regulatory and supervisory oversight."

Nevertheless, a report published in May by the EU Court of Auditors criticized the ECB for not sufficiently pressuring the slightly over 100 banks it supervises to reduce bad loans. The report also accused the ECB of being overly lenient towards high-risk lenders.