Guest Commentary: Erkki Liikanen
(This commentary appeared in SAFE Newsletter Q2 2015)
Macroprudential Policies in Europe: A Work in Progress
Erkki Liikanen is Governor of the Bank of Finland.
In November last year, the European Central Bank (ECB) took over the responsibility of supervising banks in the euro area. It is less well known that, at the same time, the ECB became the ultimate macroprudential decision maker in the European banking union. More specifically, the ECB can apply higher requirements for specific macroprudential tools than proposed by the designated national macroprudential authorities if it deems that the suggested national measures are inadequate.
In contrast to the single monetary policy, macroprudential policy in the banking union is a joint responsibility of different authorities. The main responsibility for macroprudential policy lies with the national authorities. They are best positioned to detect country-specific systemic risks and to take the appropriate measures to address them.
The role of the ECB in macroprudential policy is to enhance national policies and to reduce the inaction bias inherent in taking unpopular and intrusive national actions. The ECB will help to identify potential financial stability risks and foster a coordinated stance for macroprudential policies among the euro area Member States. The European Systemic Risk Board (ESRB) in turn monitors the development of EU-wide cross-border and cross-sectional systemic risks and provides guidance and recommendations to the national authorities.
A necessary precondition for successful macroprudential policies – both at the national level and for the banking union as a whole – is the availability of sufficient macroprudential tools. Importantly, the Capital Requirements Regulation and Directive (CRR/CRD IV) provide the ECB and the national authorities with a common minimum set of macroprudential tools for the banking sector. These include, for example, countercyclical capital buffer requirements, capital surcharges for systemically important institutions and minimum risk weights for real estate exposures.
However, I would argue that in most euro area countries the national toolkit should be strengthened. For example, in many countries the tools for containing excesses in housing markets and for building resilience against the realization of housing-related risks are not strong enough. We should also develop new tools to address systemic risks potentially developing in the so-called shadow banking sector.
The availability of strong national macroprudential toolkits and the courage to use the tools are of utmost importance in the current environment of very low interest rates. While the ECB´s current monetary policy measures are necessary to achieve its primary objective of maintaining price stability and to ensure that inflation does not remain too low for too long, I am aware that the current monetary policy measures may have unintended side effects on the financial system.
The ECB’s governing council closely monitors the potential risks to euro area financial stability, including those related to excessive risk taking. Currently, these risks are contained; but, should they begin to get out of hand, macroprudential policy would be best suited to address them.
It is clear that there is much work to be done in order to make the European financial system safer. Evaluating the sufficiency of the toolkits of both national authorities and the ECB, as well as learning how to use the new tools most effectively, is a work in progress that needs to be continued. But I strongly believe that we are taking important steps in the right direction.