Fabio Panetta: On the special role of macroprudential policy in the euro
area
Remarks by Mr Fabio Panetta, Deputy Governor of the Bank of Italy, at the Netherlands
Bank (De Nederlandsche Bank), Amsterdam, 10 June 2014.
* * *
Introduction
I would like to thank Klaas Knot and De Nederlandsche Bank (DNB) for inviting me to this
seminar. It is a pleasure to be here, and to carry on our discussions of the challenges
associated with the implementation of macroprudential policy (MAP).
Policy-makers around the world have been engaged in recent years in a wide-ranging debate
on the potential role of the new, as yet broadly untested, MAP regime and its connection with
two other regimes that share similar features but have a much longer history, namely
microprudential policy (MIP) and monetary policy (MP). The fact that MAP is or will soon be
operational in many advanced economies does not diminish the importance of continuing this
debate, especially in the euro area, which is in many ways a natural laboratory to study the
challenges posed by MAP.
First, euro-area economies rely heavily on bank credit to finance the real economy. Second,
their banking markets have become increasingly concentrated in recent years, and might
become more so in the future as a consequence of market pressures and banking union.
Third, the euro area is subject to a single MP regime, but its stance cannot take into account
the heterogeneity among member states and its transmission mechanism has been
weakened by financial fragmentation. Finally, major changes are taking place on the
institutional side for both MIP and MAP, with an increased centralisation of functions within
the ECB, but also a notable retention of responsibilities at the national level.
I will argue that this state of affairs has two main implications. The first one is that MAP is
likely to be particularly important and powerful in the euro area. The second one is that its
interaction with MIP and MP raises issues - opportunities as well as difficulties - that are
specific to the euro area and in many ways more delicate than those faced by policy-makers
elsewhere. In particular, an open dialogue between micro and macroprudential regulators is
absolutely essential in this respect, especially today: our handling of the interplay between
MAP and MIP is setting a precedent and shaping public expectations on how the two policies
will work in the future, so any opacity on what we are doing, or why we are doing it, could be
extremely damaging.
In the following paragraphs I will first recall three key factors that make the euro area's case
special: high reliance on banks (Section 2); heterogeneity and fragmentation (Section 3); and
concentration of the banking system (Section 4). I will then comment on "what to do next"
(Section 5) and discuss some of the practical challenges surrounding the implementation of
MAP (Section 6). The thread running through the arguments, to which I will come back in my
concluding remarks, is that MAP can certainly play a prominent role in the euro area, both
structurally and in today's situation, and that special care must be taken in operationalising it
to exploit the synergies with MIP and MP.
1. High reliance on banks
One key common denominator of the euro-area economies is that they rely heavily on bank
finance. Financial markets and non-bank intermediaries are less developed than in the US or
the UK, and typically do not fully compensate for shifts in the supply of bank credit.
The MAP toolbox is generally thought to operate mainly through the banking sector; this is
certainly the case for most of the instruments that we are beginning to explore following the
introduction of the Basel III and CRD-IV-CRR regulation.1 Hence, the regime could be both
more powerful and more important here than in market-based economies. If a variation in
MAP capital buffers had a broadly similar impact on the supply of bank credit in the US and
in the EA, I would expect its impact on total credit to be stronger in the EA, where non-bank
credit is both smaller and relatively less elastic. The linkage between capital buffers and
aggregate credit gaps is also likely to be stronger in bank-centric economies. Other things
being equal, this will tend to make the risks and potential gains from using countercyclical
capital (or liquidity) buffers greater in the EA than elsewhere.
The structure of the financial system is endogenous (it reacts to changing regulation), so
MAP policies focusing on banks may ultimately affect markets or the shadow banking
sector.2 In the medium term, however, the structure of financial markets in the EA can
arguably be taken as given, so that high reliance on banks implies a more powerful
transmission of MAP.
2. Heterogeneity and fragmentation
The second distinctive factor of the euro area has to do with the heterogeneity among
member states. The business cycles of national economies are not synchronous; real and
financial markets are not completely integrated, despite significant progress since 1999. The
fragmentation of European financial markets has a structural dimension: many European
banks operate mostly in retail markets, which are by nature local markets. Furthermore,
cross-border bank penetration has always been relatively low in Europe.3 This has placed
severe strains on the MP transmission mechanism. With macroeconomic outlooks that (in
general) differ widely among member countries, and a monetary transmission mechanism
that (as of today) works in a strongly asymmetric fashion - and is least effective precisely
where it is most needed, namely in the periphery - the value of introducing policy tools with a
national focus is considerable. In this environment, country-specific MAP regimes can be
used not only to enhance financial stability but also to prevent financial and possibly real
imbalances stemming from the "one size doesn't fit any" problem that may at times be
associated with MP. This point is intuitive, but it can also be formalised, showing that MAP
rules can reduce macroeconomic volatility and improve aggregate welfare.4
We have plenty of evidence, both before and after the crisis, of discrepancies in real and
financial cycles among euro-area countries. As an example, let us consider bank lending to
firms and households during the last decade (Figure 1). Germany, France, Italy and Spain all
started off in 2000 with ratios of corporate loans to GDP in a relatively narrow range between
35 and 45 per cent (panel A). Over the following ten years, however, the ratio declined in
Germany, remained constant in France, increased in Italy, and literally ballooned in Spain.
This diversity also appeared in household credit (panel B) and house prices (panel C).
1
Countercyclical capital buffers and risk weights are obvious examples of bank-focused MAP instruments. On
the market side, one could think instead of restrictions on specific transactions (e.g. short selling).
2
Panetta (2013b).
3
From 2007 on, foreign banks accounted for 9% on average of the total number of active banks in France,
Germany, Italy, Spain and held only 6.5% of total bank assets. By contrast, in the United Kingdom foreign
banks accounted for 57% of the total headcount and held 14% of total bank assets. For the US, the figures are
28% and 23% (Claessens and Van Horen, 2013). Banks' foreign credit claims in euro-area countries declined
significantly as a consequence of the financial crisis (see Bologna and Caccavaio, 2014).
4
Angelini, Neri and Panetta (2014) examine the gains from coordinating MP and MAP in a closed economy.
Brzoza-Brzezina et al. (2013) extend the analysis to the case of two countries facing asymmetric shocks but
subject to the same MP, and find that country-specific LTVs and capital buffers have significant stabilising
effects.
Evidence suggests that a set of country- and/or sector-specific MAP measures could have
been used in the run-up to the crisis to limit the emergence of imbalances. In fact, the crisis
emphasised that policy-makers should be concerned with the whole distribution of future
economic outcomes.5 Some argue that MP could take an active stance in cases where
inflation is on target but financial imbalances generate large upside or downside risks around
its expected path.6 In any case it is clear that, in dealing with situations of the kind just
illustrated, targeted MAP tools are a powerful complement - possibly an alternative - to a
"lean against the wind" MP stance.
To the extent that credit booms, or excessive concentration of exposures within specific
sectors in specific countries, stem from externalities among banks, MAP clearly has the
potential to usefully complement a pure MIP regime.7 Many commentators have indeed
pointed to strategic complementarities - a specific form of externality by which the pay-offs
associated with a bank's decision are positively affected by the number of banks that behave
in the same way - as one of the key drivers behind the financial exuberance of the early
2000s.8 Given its focus on the solvency of individual institutions, MIP did not historically, and
probably could not in general, respond to these types of behaviour. Instead, MAP could have
discouraged, for instance, excessive mortgage lending through higher LTVs on real-estate
loans, or a disproportionate reliance on wholesale funding through an NSFR-type
instrument.9 Crucially, these would have operated across the board, regardless of whether
banks appeared individually resilient or not.
3. Concentration
The banking systems of the euro area have relatively high, and rising, levels of
concentration.10 In the medium term further impetus in this direction could stem from market
pressures and from Banking Union. So far the debate on macroprudential policy has ignored
the question of how the structure of the banking system itself might affect an MAP regime.
Yet there are at least three reasons why structure - in particular high concentration - should
matter.
First, the literature on the bank lending channel11 and the bank capital channel12 suggests
that large banks with highly liquid and diversified assets are less sensitive to MP impulses
(they adjust their credit supply more gradually to changes in the MP stance). A high level of
concentration, with credit markets dominated by a few large players, would thus make it
harder for MP to affect banking credit cycles: if the credit multiplier associated with monetary
5
Visco (2009).
6
As Stein (2014) notes, this activist approach is justified even if the monetary authority does not have an
explicit financial stability objective. The point of tackling the underlying financial imbalance is to reduce the
variance of inflation and unemployment around their target values.
7
Brunnermeier et al. (2009).
8
Acharya and Yorulmazer (2013), which builds on Rajan (1994), strategic complementarities cause herding in
banks' investment strategies: banks choose to take on correlated exposures because, if they do, negative
shocks are more likely to cause systemic crises where institution-specific (e.g. reputational) losses are
negligible and public bail-outs very likely. One could think of similar complementarities on the liability side of
the balance sheet.
9
See Catte, Pagano and Visco (2010) on the role of MAP in the US, i.e. whether adopting it would have
prevented the bubble; see also Neri (2012).
10
Between 2005 and 2011, the market share of the three largest banks in the European Union increased from
roughly 46% to over 60%; in the US, it went from 20% to 30%, while in Japan it remained stable at about 40%
(Bijlsma and Zwart, 2013).
11
Kashyap and Stein (2000).
12
Van den Heuvel (2001); Gambacorta and Mistrulli (2004).
policy is low, any attempt to control credit aggregates through MP interventions would require
large swings in interest rates, which in turn could cause significant distortions in relative
prices outside the financial sector. While the effectiveness of MAP tools is still largely
untested, a euro-area-wide MAP framework might well fill an important gap in this respect.
Indeed, big, liquid, diversified banks may respond more to MAP impulses, as we know that
right up until the onset of the crisis the capital ratios of large banks were very close to the
regulatory minima. If this regularity were to be confirmed in the future despite regulatory
changes, then we could conclude that large banks, with their thin capital buffers, are likely to
be more sensitive to a countercyclical capital buffer (CCB) tightening.
A second, related point is that the interaction between MP and MAP ought to be weaker and
thus less problematic when the market is more concentrated. One important finding of the
literature on the interaction between MP and MAP is that there can be significant overlaps
between them.13 However, insofar as concentration weakens the financial stability spillover of
MP by making banks' lending decisions less dependent on the monetary policy stance, it
also widens the scope for independent macroprudential decision-making.14 This would be
good news for the euro area, where the policy framework should place national MAP
authorities in a good position to internalise conflicts between MAP and MP.
Finally, the concentration of the industry is also an important determinant of the extent of any
overlaps, hence potential tensions, between MAP and MIP. To see why concentration
matters in this context, think of two polar cases. In a one-bank economy, the overlap
between MIP and MAP is perfect, and coordination is crucial. If there is no coordination, in a
recession the MIP authority raises its requirement, the MAP authority reduces its own, and
they end up neutralising one another. In an economy with many (N) small banks, on the
other hand, the overlap must be less significant. As long as the banks' levels of capitalisation
differ, the MAP authority can lower the requirement on all banks while the MIP authority can
pursue its objective of preventing idiosyncratic bank failures by raising capital requirements
for the k banks it identifies as fragile. In net terms, capital requirements will be effectively
reduced only for N-k banks. This means that MAP is again diluted by MIP, but the dilution is
targeted to the banks that need higher ratios in relation to their risk. Furthermore, the
combined intervention stimulates a reallocation of credit from fragile to sound banks, which is
of course a desirable outcome.15
MIP and MAP are clearly complementary from the operational standpoint. The synergy works
in two ways: MAP analysis should inform and help focus the activity of micro supervisors; at
the same time, micro supervisors will have a key role to play in implementing most macro
policy interventions, because these are largely based on the use of micro tools to pursue
macro objectives.16 However, the two policies have different aims, and the example above
suggests that the tension between them may be more severe in concentrated banking
systems.
Compared with other systems, EA economies are in many ways closer to the polar one-bank
case. This means that it is crucial to work out an explicit ranking of the policy objectives. As a
consequence, clearly defining the processes that regulate the interaction between MIP and
MAP authorities will be particularly important for the EA. To my mind it is clear that the
overarching MAP objective of reducing systemic risk logically precedes the MIP objective of
preventing idiosyncratic bank failures, for three complementary reasons. First, no individual
bank can be deemed sound where significant systemic risks loom large: as we learned in
2008-9, even liquid and well-capitalised banks can be quickly cornered if funding markets
seize up or asset prices plummet owing to fire sales. Second, idiosyncratic bank failures are
a matter of concern almost exclusively for systemic spillovers: a bank's failure may or may
not constitute a serious problem, depending on whether its counterparties can withstand its
demise. Third, experience shows that big, well-diversified banks are largely sheltered from
idiosyncratic shocks and can only become insolvent because of a systemic shock. On these
premises, my view is that MIP should work to fine-tune regulatory requirements for individual
institutions subject to the provision of adequate aggregate financial stability by MAP.
The governance structure we set up in the euro area might strike external observers as
overcomplicated. Yet its design is conceptually appealing, because it puts us in a good
position to insure coordination between MIP and MAP at both European and national level.
What is crucial is that the ECB retains both MIP responsibilities (through the Single
Supervisory Mechanism) and, in coordination with the European Systemic Risk Board, direct
MAP powers to adjust the policy stance of individual national authorities (through CRR/CRD
IV). The Governing Council should thus be able to internalise any tensions between MIP and
MAP and establish a well-defined hierarchy between them.
4. Caveats: getting MAP to work
There are, of course, risks and uncertainties attached to the implementation of MAP in the
euro area. A first challenge - and one that is clearly not confined to the euro area only - is
that financial cycles, like most economic phenomena, are notoriously difficult to identify
ex ante. Assessing in real time the causes behind any divergence among countries or
markets, and establishing to what extent they reflect fundamentals, is not easy. One should
guard against the temptation to look at a handful of indicators in isolation. MAP should ideally
be grounded in the analysis of a broad set of risk indicators and rely on a joined up, holistic
view of how these are related to economic fundamentals, domestically and abroad. Structural
economic models can certainly help, but they are plainly not rich enough to capture all the
dimensions of the problem. Hence, MAP policy-making is largely judgmental, and will remain
so for some time to come.
To operationalise MAP it is also crucial to identify how far banks (that is, leveraged financial
intermediaries) are involved in any hypothetical build-up of risks. The amount of systemic risk
generated by a bubble depends on a number of factors, including who is financing it and
whether the funding comes in the form of equity or debt. Typically, it is the direct participation
of banks in a bubbly market that can turn a local problem into a systemic event.17 Real-estate
markets are an interesting example of this problem, so allow me to return briefly to the credit
and house price data I used earlier. Preliminary statistical evidence suggests that in several
EU countries bank lending predicts house prices (Table 1). This is consistent with credit
being an important determinant of the demand for housing. An inverse causation, with higher
prices driving more real-estate financing by banks, is potentially more problematic because it
may signal that asset prices are distorting banks' choices: prices might be growing for
exogenous and possibly non-fundamental reasons (a "bubble" or a wave of optimism), and
banks might be piling in to reap capital gains on the housing stock. In this case the
probability of a sharp correction in prices is higher. Such a correction is also more likely to
translate into a banking crisis unless macroprudential measures are appropriately tightened
beforehand. Interestingly, the only country for which house prices predict credit among those
listed in Table 1 is Spain.18
Even when the diagnosis is reasonably clear (as was apparently the case for the Spanish
mortgage market in the early 2000s), political economy may get in the way of MAP: in
practice, it is difficult to "take the punch bowl away". Furthermore, there is a risk that national
authorities may design and manage national MAP regimes in a way which, although rational
from a domestic perspective, could have undesired consequences. For example, national
authorities may relax constraints on lending in order to stimulate the expansion of the
domestic banking sector, with potential adverse spillovers for financial stability in other
markets.
The controls at the ESRB and SSM level mitigate the risk of these negative spillovers, but
other risks are more subtle and harder to address. When faced with an increase in a specific
sectoral risk, relating for instance to real-estate loans, a national MAP authority could force
banks to hold more capital by a) raising the overall capital requirement, b) creating an ad hoc
buffer on real-estate exposures (although presently this is not allowed under the
CRDIV/CRR), or c) increasing the risk weights. These seemingly identical measures actually differ
in important ways. One of them is the degree to which regulators wish to be transparent
about what their concerns are: the nature of the vulnerability may not be fully disclosed in
case a). Another is the impact on market perceptions: compared with their foreign peers,
domestic banks would look relatively better capitalised in cases a) and b), while they would
be perceived as relatively undercapitalised in c).
The euro-area configuration, with the ECB-SSM in a position to top up national measures,
goes in the direction of assuaging political economy concerns of this kind. The punch bowl
may be taken away by someone other than the host, namely a supranational authority.
Furthermore, the fact that all individual initiatives must pass the collective examination of the
ESRB and/or the Governing Council limits the scope for strategic choices by individual
countries. MAP is certainly going to be "an adventure more than a job", and it will entail a lot
of adaptation and learning by doing. Here practice must necessarily come before theory. But
since MAP can play a crucial role in resolving current economic difficulties, and the euro area
has a sound institutional framework in place to handle it, our practice should begin in
earnest, and sooner rather than later.
5. What could MAP do today, and how?
These reflections suggest that MAP could make a considerable difference in the euro area. It
is likely to be a powerful instrument; it reintroduces a degree of flexibility that could
compensate for the lack of national monetary policy frameworks; and it can relieve monetary
policy of some of its burden. The question is how to relate this structural discourse to our
current impasse. As we know, the euro area is not in good shape: inflation is too low, growth
is weak, MP is stretched and affected by financial segmentation, banks' balance sheets are
still strained, credit is scarce. Credit growth is weak across the area, although the underlying
causes might differ across countries, and the need to stimulate credit supply accordingly
ranks high on policy-makers' agenda.19 Thus, the dilemma faced by MAP today is how to
improve the financing conditions without further undermining banks' resilience.
How should this dilemma be resolved? The set of recent policy initiatives taken and
discussed within the ESRB suggests that decision-makers have reached a consensus. In the
Netherlands the central bank has announced the introduction of a systemic risk buffer for
banks starting in January 2016, and similar initiatives have been taken in Belgium, Croatia
and Estonia.20 The core of the consensus thus appears to be (a) that the key MAP
instruments in these circumstances are bank capital ratios and (b) that a conservative policy
stance is called for. In short, all we need is "more bank capital". This consensus has
emerged without an explicit debate on the underlying policy trade-offs, and it has implicitly
reduced the broad question of "what MAP should do" to a narrow debate on "whether capital
requirements should go up or down". This state of affairs is dangerous and potentially
harmful, regardless of one's conclusions on the pros and cons of raising capital
requirements. This for three reasons.
First, we are not paying enough attention to the relation between MAP and MIP. I argued
earlier (i) that the interplay between the two is delicate, (ii) that coordination is important,
particularly in the euro area, and (iii) that MAP should take priority over MIP when their
objectives appear to clash. From this point of view, our conduct seems an example of how
not to run MAP. Interactions and coordination have indeed been largely absent from the
policy discussion. For example, given the great heterogeneity in banks' conditions, one could
ask whether resilience could be improved by a set of selective MIP interventions on weak
institutions, rather than a non-discriminatory increase in MAP capital requirements. This
option, however, is not being discussed. We are glossing over the issue of coordination
between MAP and MIP. The absence of discussion is bad per se, and it also carries a subtler
but equally negative implication: the observed alignment between MAP and MIP authorities
(both of which push for banks to hold more capital) could be interpreted as a sign that we are
simply placing MIP objectives above MAP. As I remarked above, I consider this approach to
be deeply problematic.
The second pitfall is that we seem to have accepted that bank capital ratios are practically
the only weapon in the MAP toolbox. A behavioural economist would view this focus on
capital as an example of ambiguity aversion. That is, we might be acting mainly through
capital ratios for the same reason stock market investors over-buy domestic stocks - simply
because we know them better.21 Like a home bias in investment, such a "capital bias" can
obviously be suboptimal: we could gain by greater "diversification" of our intervention
"portfolio". Furthermore, if we determine that tighter capital requirements are necessary but
believe they have a negative spillover effect on credit supply, we should combine the
tightening with initiatives to mitigate pro-cyclicality. A useful analogy can be drawn with MP,
where interventions aimed at controlling the exchange rate can be sterilized in order not to
affect the domestic money supply. In our case, we should be looking for ways to sterilize the
impact of stiffer requirements on aggregate credit and economic activity. Admittedly, this is
not easy, but it is possible. For example, it could be done by incentivising banks to build up
their capital ratios through cost rather than credit cuts (I will shortly provide an example of
this, based on our recent experience at the Bank of Italy). It could also be done by facilitating
firms' recourse to non-bank intermediaries (such as insurance companies) or by stimulating
bond and stock issuance, in particular by SMEs.22
The third problem is that the consensus does not seem to rest on a clear, shared
understanding of the cause of the credit crunch. It should, because there is no ready-made,
cookbook-style answer to the question of what MAP should do in a recession with weak
credit (or in any other situation for that matter), as the policy measures to mitigate the crunch
will differ with the causes. We should be wary of recipes that simply suggest more capital
because "risk is high", or less capital because "credit is weak", without further analysis of the
fundamental factors that drive the data.
For example, if the credit crunch is caused by high credit risk, then higher capital
requirements would certainly be the right choice. But if instead it depends on high funding
costs for banks regardless of their individual situation (say, the poor condition of the domestic
sovereign), raising capital charges might work (well-capitalised banks also obtain funds at
lower rates) but it would clearly be second-best (central banks have a range of alternative
tools that affect banks' funding more directly). Finally, consider a crunch caused by a
problem of coordination among banks. When an economy with a concentrated banking
system is at a turning point, large lenders certainly have a notion that the speed of the
recovery depends on their lending strategies, and they might well realise that lending more,
or on softer terms, is the optimal strategy because it would stimulate growth and generate
higher returns. Even in that case, however, it could well be that nobody is willing to bear the
risk of expanding their balance sheet unless everybody else does likewise. The reason is
that without coordination the recovery will not start and the lender who took the solitary
initiative will pay all the costs of running a large balance sheet in a still recessionary
environment: a credit crunch could emerge as a suboptimal Nash equilibrium. In this case,
MAP policy could facilitate coordination among lenders to bring the crunch to an end and
make the banking sector sounder.23 These stories are all possible and credible. Any policy
prescription should be based on a discussion of which of them we believe to be most
plausible. It seems to me that so far this discussion - like those on MAP-MIP interactions and
MAP tools mentioned above - has been largely bypassed.
The current conjuncture obviously puts pressure on policy makers to act decisively and
narrows the room for wide-ranging discussion of governance and general principles. The
MAP mechanism is now operating in conditions that are very different, and probably more
complex, than those that will prevail in the future: in the pre-crisis period banks did not build
up sufficient macroprudential capital buffers, greatly complicating the policy dilemma. After
all, increasing prudential capital requirements might well be the right policy choice given the
uncertain prospects of our economies. My main contention is that, even if that is so, we
cannot afford to restrict ourselves to this strategy, or stick to it in a way that the public may
see as a-critical.
The decisions we take today set an important precedent for how MAP will work and how it
will be expected to work in the future. Accordingly, I submit that being transparent on the
logic behind MAP initiatives and making sure that that logic is consistent with our agreed
principles, is at least as important as getting the details of any specific intervention right.
The costs of setting a bad precedent or weakening the credibility of MAP, and particularly
of its countercyclical nature, are hardly quantifiable, but I suspect that they would be very
high indeed. The only way to contain them is to make sure that our decisions - whatever
they are - derive from first principles, rest on sound economic analysis, and represent the
outcome of a transparent, open dialogue among the authorities.
6. From theory to practice
Speculating on the interactions between MP, MAP and MIP in abstract is one thing. Bridging
the gap between theory and practice, and setting up mechanisms that run reasonably
smoothly, is another. Like many other central banks in the euro area (and beyond), the Bank
of Italy has a micro (MIP) supervisory function that coexists with its macro (MP) function.24
This coexistence requires two elements. The first one is a protocol that regulates the
bottomup flow of information and allows the Board to form a consistent view of the state of affairs
and of the related risks. The second one is a mechanism that defines the top-down
transmission of decisions, assigning clear responsibilities to all the sub-structures involved in
implementing any policy interventions agreed by the Board.
Seen through a financial stability-MAP lens, the information flow within the Bank of Italy can
be divided into three phases. First, risks are examined separately by the areas with the
relevant expertise. Micro risks relating to banks' balance sheets are examined by the
supervisory directorates; risks relating to money markets are monitored by the markets and
payment systems directorate; macro conditions of any other kind are looked at by the
economics and statistics directorate. This information is shared and debated within the
Financial Stability Coordination Committee. Meetings are ordinarily held twice a year, but can
be called at any time by the committee members - the heads of the key directorates - or by
its chair - a deputy governor. The third and last phase involves a discussion with the Board
on the key conclusions, which includes a critical assessment of the evidence, a ranking of
the risks and, if necessary, a list of suggestions for potential policy actions.
A supervisory initiative launched by the Bank of Italy in 2012 provides an example of the
workings of this mechanism. In that case, a prolonged fall in non-performing loan coverage
ratios (a micro signal) was deemed to be a potential threat for market confidence, particularly
in a recessionary scenario (a macro issue). The Bank therefore laun