Jean-Claude Trichet: Press briefing on the "ECB Financial Stability Review"
Opening remarks by Mr Jean-Claude Trichet, President of the European Central Bank, Frankfurt
am Main, 15 December 2004.
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Ladies and Gentlemen, welcome to this special press briefing on the publication of the ECB's
Financial Stability Review 2004.
Let me start by saying that in publishing this Financial Stability Review the European Central Bank
(ECB) is joining a growing number of central banks around the world that are addressing their financial
stability mandates in part through the periodic issuing of a public report. Under Article 105 (5), the
Treaty establishing the European Union assigned to the Eurosystem the task of contributing "to the
smooth conduct of policies pursued by the competent authorities relating to the prudential supervision
of credit institutions and the stability of the financial system". In this vein, the purpose of publishing this
review, which represents the common view of the Governing Council of the ECB, is to promote
awareness in the financial industry and among the public at large of issues that are relevant for
preserving and enhancing the stability of the euro area financial system. By providing an overview of
sources of risk and vulnerability to financial stability, the review also seeks to help preventing financial
tensions.
Central banks have a strong and natural interest in the safeguarding of financial stability. This is in
particular because financial institutions, notably banks, are issuers of by far the largest component of
the money stock. It is equally because a stable financial system is needed for an effective
transmission of monetary policy and for the smooth operation of payment systems. A robust financial
system is therefore needed to ensure that the single monetary policy can deliver on the primary
objective of maintaining price stability in the euro area. Finally, but not least, the health of the financial
system is inextricably intertwined with the performance of the economy and its resilience to shocks.
These are the reasons why the ECB and the Eurosystem have an important stake in financial stability
in the euro area.
Complex to define, financial stability is not only of the essence in avoiding financial crises but also in
paving the way for the best financial environment in normal times. It is a condition where the financial
system is capable of performing well in normal times all of its normal tasks and where it is expected to
do so for the foreseeable future. From this viewpoint, financial system stability requires that the
principal components of the system - ie financial institutions, markets and infrastructures - are jointly
capable of absorbing smoothly a full array of adverse disturbances. It requires that the financial
system is facilitating an efficient reallocation of financial resources from savers to investors, that
financial risk is being assessed and priced accurately and that risks are being efficiently managed.
Financial stability also has an important forward-looking dimension. For instance, inefficiencies in the
allocation of capital or shortcomings in the pricing of risk can, by laying the foundations for future
vulnerabilities, compromise future financial system stability and therefore economic stability.
Three steps are needed to produce a comprehensive picture of the stability of the financial system.
The first entails forming an assessment of the individual and collective robustness of the institutions,
markets and infrastructures that make up the financial system. The second involves an identification of
the main sources of risk and vulnerability that could pose challenges for financial system stability in
the future. The third and final step is an appraisal of the ability of the financial system to cope with
crisis, should these risks materialise. The overall assessment will determine whether remedial action is
needed.
It is important to bear in mind that calling attention to the potential sources of risk and vulnerability to
financial stability does not aim at identifying the main - or most likely - future scenario for the euro area
economy. It neither aims at identifying the full balance of risks surrounding this main scenario as is the
principal focus in the monetary policy assessment and decision-making process. Rather it entails the
highlighting of potential and plausible sources of negative events, even if these are remote and very
unlikely.
The analysis contained in the review was prepared with the close involvement of, and contribution by,
the Banking Supervision Committee (BSC). The BSC is a forum for cooperation among the national
central banks and supervisory authorities of the EU and the ECB. The collaboration with the BSC has
meant that the review draws upon a very broad knowledge-base and the analysis contained within it
blends together the macro perspectives of central bankers with the micro perspectives of supervisors.
Let me now give the floor to Mr Padoa-Schioppa, who will present to you the main findings of our
analysis.