Vítor Constâncio of ECB on Tackling Financial Stability Risks in EU
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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