Pablo Hernández de Cos: The role of macroprudential policy in the stabilisation of macro-financial fluctuations

Speech by Mr Pablo Hernández de Cos, Governor of the Bank of Spain, at the Conference on Financial Stability, organised by the Banco de Portugal, Lisbon, 2 October 2023.  

Ladies and gentlemen, bom día.

Thank you very much for your kind introduction, Mario, and thank you for inviting me to this conference. It is always a pleasure to come to Lisbon.

I would like to use this opportunity to consider the role of macroprudential policy in the stabilisation of macro-financial fluctuations and ways to enhance this role.

Macroprudential policy objectives

The global financial crisis taught us some important lessons from a financial stability perspective. Firstly, that individual financial institutions needed greater and higher quality capital and liquidity buffers. Second, that an exclusively microprudential approach to capital requirements cannot take into account how the actions of individual banks impact the financial system as a whole, interacting with those of other banks and of the rest of the players in the system, and influencing the probability of future crises.

As a consequence, and focusing on the banking sector, the Basel Committee on Banking Supervision (BCBS) undertook an ambitious overhaul of the prudential regulatory framework, known as Basel III, which is now very close to being fully transposed into the legislation of the main jurisdictions.

Together with a strengthening of microprudential requirements to boost individual bank resilience, a significant aspect of this reform was the introduction of macroprudential policy, with the specific goal of mitigating the accumulation of systemic risk in the financial system, both over financial cycles (time dimension) and across financial market participants (crosssectional dimension). The reasoning behind this goal is that the materialisation of systemic risk can impair the financial system and disrupt the provision of financial services, with serious negative effects for the real economy.