[the rivalry between the ECB and inflation exposes the fragility of the financial system] the confrontation between the ECB and stubbornly high inflation reflects vulnerabilities in the financial system that are increasingly difficult to ignore. In its twice-yearly financial stability assessment on Wednesday, the central bank said rising interest rates were testing the resilience of households, businesses, governments and the real estate market. The central bank warned that this made the market vulnerable to disorderly adjustment. While banks have shown amazing resilience to the recent turmoil in the US and Switzerland, rising funding costs and declining asset quality could still undermine banks' profitability. "Price stability is still essential for lasting financial stability," ECB Vice President Guindos wrote in the preface to the report, before describing the side effects that policymakers must now accept. "tighter financing conditions have forcefully addressed high inflation, promoting a reassessment of the economic outlook and reversing the over-compressed asset price risk premium," he said. "as the financial environment normalizes, this could expose vulnerabilities and faults in the financial system." (Bloomberg)