Mario Draghi: Macroprudential policy in Europe

SPEECH

Macroprudential policy in Europe

Welcome remarks by Mario Draghi, President of the ECB and Chair of the European Systemic Risk Board, at the fourth annual conference of the ESRB

• Frankfurt am Main, 26 September 2019 It is my pleasure to welcome you to the fourth annual conference of the European Systemic Risk Board (ESRB).
• Since this is the last time I will open this conference as Chair of the ESRB, I wanted to reflect on the development of macroprudential policy over the course of the past eight years.
• In that time it has evolved from an idea that mostly existed on paper into policy instruments that have been widely implemented.

Establishing macroprudential policy in Europe

• At the start of my term in 2011, Europe was still dealing with the aftermath of the global financial crisis.
• While many central banks communicated on financial stability issues prior to the crisis, very few countries had established national macroprudential authorities with a specific mandate and precise instruments for policy action.
• Some of the tools that we would today call macroprudential instruments were used by central banks in Europe during the post-war period, albeit usually for the purpose of demand management.
• [4] An internet search on the word macroprudential yields 5,000 hits for the eight-year period from 2000 to 2007.
• Despite that recognition, macroprudential policy in Europe was far from operational in 2011.
• Indeed, when the European rules establishing a common legal basis for macroprudential instruments for banking came into effect in January 2014, ten Member States still had not implemented them in primary national legislation.
• Moreover, there was a real risk of inaction bias since the costs of macroprudential policy are visible and are felt immediately, but the benefits accrue over time and are difficult to quantify.
• [5] Given this somewhat tentative start for macroprudential policy in Europe, substantial progress has been made over the past eight years.

Areas for further progress in macroprudential policy

• We need progress in three key areas to counter systemic risk more effectively: better analytical tools, new instruments that counter the development of risk outside the banking sector and a clearer framework to govern policy actions.
• The second area of improvement for the macroprudential framework in Europe involves keeping pace with developments in the financial system.
• That requires broadening the range of macroprudential instruments beyond those currently available, which focus almost exclusively on the banking sector.
• [11] The third area for improvement in macroprudential policy involves establishing a clearer conceptual framework to govern policy discussions and interventions.
• For monetary policy the framework is well known and the reaction function of central banks is normally well understood by markets.
• By contrast, the framework that governs macroprudential policy interventions is much less developed, due in no small part to our limited experience of using these tools.
• Regular macroprudential policy decisions would then follow a two-stage process.

Conclusion