GLOBAL financial conditions have improved, but the Reserve Bank of Australia is warning we're not out of the woods yet.
The RBA says despite the recent flare up of financial problems in Cyprus, the euro zone's commitment to resolving its government debt and banking problems has boosted confidence.
An improvement in the US economy and recent share markets have also helped.
And the improved confidence levels have helped lower the cost of borrowing for governments in a number of euro zone countries.
However the RBA believes the euro zone faces significant challenges to its stability.
"Many banks, particularly on the periphery, are still experiencing elevated funding costs, deteriorating asset performance and weak profitability," the RBA said in its twice-yearly Financial Stability Review released on Wednesday.
The RBA warned that Europe still needs to repair its banking system while also promoting economic growth for the problems to be fully resolved.
"It is too early say whether the improved in market sentiment over the past six months is the beginning of a sustained recovery or merely a temporary upswing," the central bank report said.
Meanwhile, the RBA believes Australia's banks are in a strong position and the improved global conditions since mid 2012 had helped lowered wholesale funding costs.
Growth in savings was outstripping credit growth and there was strong competition for bank deposits.
The big four banks were also still raking in record profits and improving their capital position.
"With domestic demand for credit likely to remain moderate in coming years, banks are increasingly pursuing other strategies to underpin their profit growth," the RBA said.
However the RBA warned against lowering lending standards and advised banks to be cautious as they expanded into Asia.
