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March 14, 2018

At the ECB and Its Watchers XIX Conference in Frankfurt, the ECB Vice President Vítor Constâncio spoke about using macro-prudential policy to address financial stability risks in the euro area. He believes that monetary policy and macro-prudential policy "are different and should remain separate," and that "monetary policy should not respond to financial stability concerns." He further opines that macro-prudential policy is "the most effective tool for safeguarding financial stability."

The ECB Vice President emphasizes that there are synergies and trade-offs between monetary and macro-prudential policies. In the context of euro area, the relative effectiveness of macro-prudential policy to tackle the build-up of financial stability risks is even more pronounced because, in a monetary union, a single monetary policy is not well-suited to deal with financial imbalances emerging at the national level. Such imbalances can be better tackled through targeted national macro-prudential measures. "The cross-country and cross-sector heterogeneity of localized vulnerabilities underlines the advantage of macro-prudential policy in containing financial stability risks, namely the possibility to activate policy instruments in a targeted manner." He then outlined the capital- and borrower-based macro-prudential instruments implemented by the national authorities, highlighting that these measures "do not reach beyond the banking sector" to cover credit intermediation that is conducted by non-bank financial institutions. "Europe should thus expand the toolkit to cover maturity mismatch and leverage also in the non-banking sector. The ongoing review of the macro-prudential framework in the EU provides an excellent opportunity to make these necessary tools available to macro-prudential authorities on a common legal basis."

He concludes that, "The institutional setup in the euro area, with distinct roles assigned to monetary policy for the maintenance of price stability and to macro-prudential policy for safeguarding financial stability, is well-placed to achieve both of these objectives." He also emphasized that the legal macro-prudential policy framework in Europe needs to be enhanced by introducing new instruments, including for non-banks, and by allowing member states and ECB more flexibility to activate those instruments. Additionally, he believes that the forthcoming review of the Capital Requirements Directive and Regulation (CRD IV/CRR) will not deliver the comprehensive reform of the macro-prudential framework, which would be important to "continue safeguarding financial stability in the euro area."

Related Link: Speech

Keywords: Europe, EU, Macro-prudential Policy, Financial Stability, CRD IV, CRR, ECB

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