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Single market vs
eurozone: financial
stability and macro-
prudential policies
23 April 2015
The new financial architecture...
Rubric
www.ecb.europa.eu ©
Never let a good crisis go to waste *
The financial crisis which started in 2007 elicited 2 typ...
Rubric
www.ecb.europa.eu ©
Source: ECB, FED
3
Fiscal and monetary policies during the crisis
0%
2%
4%
6%
8%
10%
12%
2006 2...
Rubric
www.ecb.europa.eu ©
Source: BIS
4
Credit and GDP during the crisis
Source: BIS, Eurostat, FED
Real GDP per capita (...
Rubric
www.ecb.europa.eu ©
What did we learn from the policy mixes of
the past few years?
•In terms of the business cycle,...
Rubric
www.ecb.europa.eu ©
The new framework in the European Union - I
Much of the new framework was developed in Basel, t...
Rubric
www.ecb.europa.eu ©
The new framework in the European Union - II
While the tools are common to all countries, the g...
Rubric
www.ecb.europa.eu ©
The new framework in the European Union - III
Each country in the EU chooses how to organise it...
Rubric
www.ecb.europa.eu ©
Real and financial relationships within the EU
UK
Euro Area
19: BE, DE, EE, IE, GR, ES, FR,
IT,...
Rubric
www.ecb.europa.eu ©
Challenges: the EA and CEE - I
• CEE countries have mostly pegged their currency to the
euro: t...
Rubric
www.ecb.europa.eu ©
Challenges: the EA and CEE - II
How likely is this going to be a problem?
•Business cycles are ...
Rubric
www.ecb.europa.eu ©
Challenges: the EA and the UK
• A flexible exchange rate means a more independent
monetary poli...
Rubric
www.ecb.europa.eu ©
Conclusion: the EA within the single market
a financial stability perspective
• The key role of...
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Single market vs eurozone: financial stability and macro-prudential policies | The New Financial Architecture in the Eurozone

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Conference: The New Financial Architecture in the Eurozone - Pierre Werner Chair, Robert Schuman Centre for Advanced Studies, European University Institute

By: Carmelo Salleo, ECB

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Single market vs eurozone: financial stability and macro-prudential policies | The New Financial Architecture in the Eurozone

  1. 1. Single market vs eurozone: financial stability and macro- prudential policies 23 April 2015 The new financial architecture in the eurozone European University Institute N.B: The views expressed are the author’s and do not reflect those of the ECB. Carmelo Salleo ECB - DG MF/MAF
  2. 2. Rubric www.ecb.europa.eu © Never let a good crisis go to waste * The financial crisis which started in 2007 elicited 2 types of responses: •Conjunctural: fiscal, monetary, prudential policies were put in place to mitigate the impact of the crisis and rebound – with mixed results. •Structural: policy makers devised a new analytical and institutional framework for a comprehensive approach to financial stability. * Winston S. Churchill.
  3. 3. Rubric www.ecb.europa.eu © Source: ECB, FED 3 Fiscal and monetary policies during the crisis 0% 2% 4% 6% 8% 10% 12% 2006 2007 2008 2009 2010 2011 2012 2013 2014 expected UK US EA Source: Bloomberg Unconventional Monetary Policy: Central bank’s balance sheet / GDP Monetary vs. Fiscal Policy: Government debt bought by central banks Source: ECB, FED, BoESource: ECB, FED, UK Debt Management Office Fiscal Policy: Government budget deficit / GDP 0% 10% 20% 30% 40% 50% 2006 2007 2008 2009 2010 2011 2012 2013 2014 UK US EA 0% 40% 80% 120% 2006 2007 2008 2009 2010 2011 2012 2013 2014 UK US EA -5 -4 -3 -2 -1 0 1 2 3 4 5 2006 2007 2008 2009 2010 2011 2012 2013 2014 UK US EA Monetary Policy: Real interest rates
  4. 4. Rubric www.ecb.europa.eu © Source: BIS 4 Credit and GDP during the crisis Source: BIS, Eurostat, FED Real GDP per capita (2006=100) Source: Eurostat Macro-Prudential Policy: Private sector credit to GDP Total (private sector+government) debt to GDP (YoY change) 95 96 97 98 99 100 101 102 103 104 105 2006 2007 2008 2009 2010 2011 2012 2013 2014 UK US EA 100% 120% 140% 160% 180% 200% 220% 240% 260% 2006 2007 2008 2009 2010 2011 2012 2013 UK US EA -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 2007 2008 2009 2010 2011 2012 2013 2014 UK US EA
  5. 5. Rubric www.ecb.europa.eu © What did we learn from the policy mixes of the past few years? •In terms of the business cycle, given the severity of the shock not surprisingly fiscal and monetary policy worked best when they were pulling in the same direction. • if the problem was debt overhang, it wasn’t solved. At most there was a substitution of public for private sector debt. •What role could there have been for macro-prudential policies before and during the crisis?
  6. 6. Rubric www.ecb.europa.eu © The new framework in the European Union - I Much of the new framework was developed in Basel, then implemented in the EU with the CRD IV/CRR. The main elements are: •To address pro-cyclicality: counter-cyclical capital buffers. •To address too big to fail: SIFI buffers, CoCos, bail-in. •To address contagion: capital buffers and sectoral requirements, limits to large exposures. •To address firesales: capital buffers and liquidity ratios.
  7. 7. Rubric www.ecb.europa.eu © The new framework in the European Union - II While the tools are common to all countries, the governance is different between EA and other countries. EA countries adhere to a banking union (others can join if they want), which means: •Common banking supervision (SSM). •Common resolution (SRM). •National central banks and the ECB share powers over macro-prudential tools (but NCBs keep exclusive control of tools not mentioned in the CRD IV/CRR, such as LTV and LTD). •In the future: common deposit insurance scheme.
  8. 8. Rubric www.ecb.europa.eu © The new framework in the European Union - III Each country in the EU chooses how to organise its financial stability oversight: •All responsibilities to the central bank (UK). •Bank supervisors are also the macro-prudential authority (Sweden). •A council with the central bank, financial supervisors and the Treasury (Denmark). KEY DIFFERENCE BETWEEN THE EA AND OTHER EU COUNTRIES: outside the EA policy makers can coordinate effectively fiscal, monetary and prudential policies, while in the SSM there is a single monetary policy while fiscal policies remain at the national level and are difficult to coordinate among themselves, let alone with the other policies.
  9. 9. Rubric www.ecb.europa.eu © Real and financial relationships within the EU UK Euro Area 19: BE, DE, EE, IE, GR, ES, FR, IT, CY, LV, LT, LU, MT, NL, AT, PT, SI, SK, FI CEE Non-EA: BG, CZ, HR, HU, PL, RO 1.4% 0.3% 54.5% 4.9% 18.1% 4.0% 75.1% 2.0% 51.2% 11.7% Notes: Full lines represent trade to GDP ratio (i.e. bilateral X+M /GDP) Dashed lines represent claims by banks vis-à-vis other EU regions as a % of total foreign claims (where available). Source: UN Comtrade, BIS Consolidated International Banking Statistics.
  10. 10. Rubric www.ecb.europa.eu © Challenges: the EA and CEE - I • CEE countries have mostly pegged their currency to the euro: their monetary policy is thus heavily influenced by ECB decisions. This means limited possibilities to use monetary policy as an independent instrument should their business cycles diverge from the EA’s. • Banking systems in the CEE are part-owned by EA banks. This means a limited scope for independent prudential policies should financial cycles diverge from the EA’s (essentially, it depends on how banks manage a consolidated balance sheet across subsidiaries). • The only degree of freedom left is fiscal policy, which already has its goals and limitations.
  11. 11. Rubric www.ecb.europa.eu © Challenges: the EA and CEE - II How likely is this going to be a problem? •Business cycles are not too divergent, and the exchange rate can be adjusted in most cases. •Some countries are entering in “close cooperation” with the SSM, i.e. they are joining the banking union and becoming “co- home supervisors of their own banks”. •The ESRB provides a forum to discuss and coordinate macro- prudential policies. •Being part of the EU ensures participating in the common development of a Capital Markets Union and of further integration of financial infrastructures.
  12. 12. Rubric www.ecb.europa.eu © Challenges: the EA and the UK • A flexible exchange rate means a more independent monetary policy. • Linkages are mostly due to cross-border flows and common exposures. • Coordination of prudential policies: from race to the bottom to gold plating – both are competitive strategies. What are the main issues? • Coordination of macro-prudential policies: ESRB. • Structural problem: the relationship between banks and markets is different in the EA and the UK. • Brexit – how would it change the balance with the EA?
  13. 13. Rubric www.ecb.europa.eu © Conclusion: the EA within the single market a financial stability perspective • The key role of fiscal policy also for financial stability cannot be ignored. Within the EA this calls for much greater cooperation and coordination also in the fiscal dimension. • Between the EA and CEE: the (semi-)fixed exchange rate regime and strong presence of EA banks in the CEE make the 2 regions very interdependent also from a financial stability perspective. This calls for more integration of prudential policies. • Between the EA and the UK (and other EU non-CEE countries?): the relationship seems sufficiently loose and with enough degrees of freedom that differences in financial cycles should have little spillovers.

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