Carlos da Silva Costa: Opening remarks - "Conference on
Financial Stability"
Opening remarks by Mr Carlos da Silva Costa, Governor of the Bank of Portugal, at the Bank of
Portugal Conference on Financial Stability, Lisbon, 17 October 2017.
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Opening Remarks by Governor Carlos da Silva Costa
Good morning ladies and gentlemen,
It is a great pleasure to be here today to open Banco de Portugal's 2017 Conference on Financial
Stability. On behalf of Banco de Portugal and the organising team, a very warm welcome to you
all!
10 years past its beginning, academics and policymakers are still struggling to build a consensus
on the policy implications of the financial crisis.
It is undisputable that the financial system in most advanced countries is now sounder than at
the onset of the financial crisis in 2007:
Funding of the core of the financial system (banks) is more stable,
An adjustment process leading to more sustainable levels of leverage took place, and
Banks are significantly more capitalized.
Nevertheless, the financial system is not immune to risks, and the existing policy instruments are
unable to fully address the persisting legacy of the crisis.
Moreover, in the aftermath of the crisis, to reduce the risk of moral hazard and protect the
taxpayer from shouldering private sector losses, there was a strong impetus against involving
public money in providing a safety net to the financial system. Bail-in principles in resolving banks
prevailed, as well as a general aversion to bail out provisions. While this should be the norm,
flexibility should be preserved to address emergency situations.
By limiting policy options on the usage of public funds, regulators may have ended up
exacerbating risks in the event of a systemic crisis. Jeopardizing financial stability will result in
output losses and damaging consequences to the overall economy.
As investors rationally act to protect themselves against the possibility of haircuts to their claims
on weaker institutions, the existing framework may actually accelerate runs and create a
heightened vulnerability to a future systemic financial crisis.
The incomplete set up of the Banking Union in Europe with the full implementation of the
resolution regime is a dangerous combination. Last week's proposal by the European
Commission risks prolonging this problem. When seen in the context of the much smaller room
for manoeuvre of monetary and fiscal policy tools, this threatens to leave us less prepared to
deal with future crises.
Therefore, despite the reforms in financial regulation, and the upgrade in analytical and
monitoring instruments, we should not convince ourselves that our ability to detect and curb the
emergence of financial imbalances has reached a point in which we are in condition to avoid any
financial crisis.
In the meantime, economic policy has acquired a macro-prudential scope, aiming at leaning
against the wind, which includes several tools as the countercyclical setting of traditional
measures of capital requirements and borrower based instruments.
However, macro-prudential policy is still quite recent and more research, namely on the
instruments that can be used and on their potential impact, is still needed. The underlying
'buffers' were not built up before (and during) the crisis, additional tools still need to be developed,
and more work is still needed to establish a comprehensive macro-prudential toolkit beyond
banking, which to date is lacking.
Issues such as how to optimally coordinate policies and how to avoid time-inconsistency
problems in this coordination are still outstanding. This is even more evident in a currency union
where monetary policy affects the entire region, but macro-financial imbalances may be local in
nature.
Today's Conference will address many of these issues by discussing:
the main challenges imposed by this changed environment on financial institutions'
profitability, behaviour towards risks and on overall financial stability;
possible issues arising from the implementation of macro-prudential policy, such as: (i)
defining the optimal policy stance, (ii) availability of policy instruments to mitigate
vulnerabilities in the downturn of the financial cycle, and (iii) the interactions of policy
instruments in the mitigation of systemic risk, and
the most promising advances in research to overcome the existing limitations to the most
commonly used methodologies in the analysis of systemic risks.
I thank you all for your participation and wish you a very pleasant and constructive conference.