Vítor Constâncio: Macroprudential policy in a changing financial system

Remarks by Mr Vítor Constâncio, Vice-President of the European Central Bank, at the second ECB Macroprudential Policy and Research Conference, Frankfurt am Main, 11 May 2017.

Ladies and Gentlemen,

It is a pleasure to welcome you to the second macroprudential policy and research conference of our annual series.

Macroprudential policy emerged from the crisis as a new tool to deal with systemic risk in the financial sector. Recognition that microsupervision of individual institutions was not sufficient to ensure financial stability led to the emergence of a new policy area. A new authority was needed to be accountable and responsible for monitoring and preventing the build-up of endogenous systemic risk in the financial sector.

As many other crises, the recent one had its origins in excessive leverage and excessive credit or debt creation in the financial system as a whole. This was partly due to the fast growing activities and entities outside the regulated financial sectors.

These excessive imbalances were not considered a risk by the economic thinking of the time. The efficient market hypothesis dominated, conflating allocative efficiency with information processing efficiency. In the prevalent macro models, the financial sector was absent, considered to have a remote effect on the real economic activity. In these model frameworks, macroeconomic fluctuations resulted mostly from technological or productivity shocks or from monetary policy unexpected measures. The economy was supposed to be mostly self-correcting and move quickly towards its steady state. No defaults of any agent were possible. Thus, excessive debt could not be a problem. As many wrote, for any debtor there was a creditor and so debt was a non-event at the macro level. This ignored the fact that banks create money by extending credit ex nihilo within the limits of their capital ratio. A loan, with its inherent risk, creates a deposit which is money. In fact, not all deposits originate from previous savings that the system only intermediates.