Dimitar Radev: Achieving the financial stability objective through
macroprudential measures cannot be sustainable without
understanding the financial cycle
Opening remarks by Mr Dimitar Radev, Governor of the Bulgarian National Bank, at the
Conference "The Current Global and European Financial Cycle: Where Do We Stand and How
Do We Move Forward?", jointly organized by the Bulgarian National Bank and the Bank for
International Settlements on the occasion of the 140th Anniversary of the Bulgarian National
Bank, Sofia, 7-8 July 2019.
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Dear colleagues,
Distinguished guests,
We are delighted to have you with us to participate and share in our joint BNB-BIS conference
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organized on the occasion of the 140 anniversary of the Bulgarian National Bank. I would like to
extend my special thanks to the General Manager Agustín Carstens and the BIS for their support
in organizing this event. This is only a latest example in decades of cooperation between our two
institutions.
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The BNB is among the oldest central banks in the world, 13 by order of establishment .
Today's conference, therefore, marks a long history of central banking in Bulgaria.
Evolution of a central bank's mandates
A central bank is historically associated with the goal of keeping the national currency and prices
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stable. After the Great Depression of the 1930 supervision has become a function entrusted to
or taken away from central banks in cycles depending on crisis experiences. With respect to
supervision as a central bank function, the 2007/2008 global crisis had two effects. First, it led to
bank supervision becoming the responsibility of an increasing number of central banks. Second,
the focus on systemic stability led to the emergence of macroprudential supervision as an
explicit concept and task for which naturally central banks have become responsible.
In Bulgaria the monetary regime can be viewed as a rather traditional one, the primary objective
of the BNB being to maintain price stability through ensuring the stability of the national currency.
For more than 20 years now, our regime has been based on the operation of the currency board.
The BNB also conducts micro- and macroprudential policies. As a matter of fact, well before the
recent global crisis we designed and applied countercyclical macroprudential measures, even
though the term 'macroprudential' was still not being used. Many other countries in the region,
subject to massive capital inflows at the time, did the same.
Therefore, the BNB's tasks and responsibilities, as we see them today, are an outcome of
decades of evolution. And this reflects, and is consistent with, the long-term developments of
central banks' mandates globally. It can be argued from a historical perspective that changes in
these mandates follow common evolutionary paths which are often shaped by crises, such as
the global one in 2007/2008.
The financial stability focus
That led to reassessing the importance of financial stability as a policy objective of central banks.
Before the 2007/2008 global crisis, central banks focused on price stability as their primary
objective. The crisis triggered a change in the broad environment in which central banks operate
and thereby also necessitated a continued evolution of the role and governance of our
institutions. Concerns were raised regarding the ability of central banks to prevent and manage
financial crises. This provoked a discussion of central banks' role in safeguarding financial
stability. Ultimately, there was recognition of the need to reconsider or adjust the central banks'
responsibilities related to financial stability.
A major policy response since the global crisis was the enhancement of macroprudential policy
framework and the assignment of additional responsibilities to central banks in the fields of
financial stability. Then central banks developed tools for the practical implementation of the
macroprudential framework.
Understanding the financial cycle
The new policy framework and tools, however, can only be as good as the capability to
"diagnose" when their application is needed. They have limited value, if any, for the purpose of
safeguarding financial stability unless the macroprudential authority can detect the accumulation
of cyclical systemic risk in the financial system.
In other words, achieving the financial stability objective through macroprudential measures
cannot be sustainable without understanding the financial cycle. That is why we have considered
this to be a topical issue to devote our anniversary conference to.
There is no single generally accepted theoretical basis, nor a dominant method, for measuring
the financial cycle. Thus the role of research becomes significant for policymaking. That is why
today's conference is conceived to bring together academic research and central bank practice.
The conference structure reflects an understanding that the global financial cycle affects the euro
area and its monetary policy, which in turn affects the financial cycle in Europe beyond the euro
area.
Therefore, the first session of the conference is on the current phase of the global financial cycle
which is to a large extent driven by the US monetary policy. We recall from the 2007/2008 crisis
how the financial disruptions originated and triggered a full-scale global crisis.
The second session is focused on the euro area financial cycle, as influenced by the global
financial cycle, and its implications for asset prices and financial stability.
Since the ECB policies also shape the financial cycle in Europe outside the euro area through
economic and financial channels, although divergences do exist, our third session is devoted to
the financial cycle in the non-euro area EU member states.
By way of example from Bulgaria, the BNB recent research and relevant estimates for the local
financial cycle indeed show that we are currently in the upward phase of accumulation of cyclical
risk. We have, correspondingly, decided to activate and then raised the rate of our
countercyclical capital buffer.
Turning to actual policy reactions in dealing with financial cycles, our conference ends with a
panel where Governors will share with us their views.
Dear colleagues and guests,
In conclusion, let me sum up my main points. First, the central banks' objective of financial
stability has emerged in the course of the historical evolution of their legal mandates and
responsibilities. Second, the application of macroprudential tools to safeguard financial stability
requires, as a pre-condition, knowledge of the financial cycle. Third, our conference programme
is organized so as to discuss this critical topic in a conceptual sequencing: starting from the
global view, elaborating on the euro area, and then turning to the financial cycle in non-euro area
Europe.
I believe our speakers and discussants will provide both theoretical insights and first-hand policy
experiences, from global and regional perspectives, for all of us to benefit from a frank exchange
of ideas and relevant practices today.
Thank you very much once again for joining us and participating in this conference, and I wish
you a very pleasant and productive stay in Sofia.
More information about the event you can find here.
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See F Capie, C Goodhart and N Schnadt, "The development of central banking", in F Capie, S Fischer, C
Goodhart and N Schnadt, (eds), The future of central banking: the tercentenary symposium of the Bank of
England, Cambridge University Press, 1994, p 6.