Carlos da Silva Costa: Opening remarks - "Bank of Portugal's 2019
Conference on Financial Stability"
Opening remarks by Mr Carlos da Silva Costa, Governor of the Bank of Portugal, at the "Bank of
Portugal's 2019 Conference on Financial Stability", Lisbon, 8 October 2019.
* * *
As prepared for delivery.
It is a great pleasure to be here today to open Banco de Portugal's 2019 Conference on Financial
Stability.
On behalf of Banco de Portugal and, in particular, of the organising team, I would like to welcome
you all!
Although these introductory remarks have to be brief, I would like to set the stage for today's
discussions by highlighting what I believe to be the critical premises for a Central Bank's
mandate on financial stability and by identifying some of the risks we are faced with today.
As recently noted by ECB's President, Mario Draghi, "[i]t was only after the crisis that there was
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widespread recognition of the importance of the macro dimension of financial stability."
Central Banks play a crucial role in ensuring economic and financial stability. They conduct
monetary policy to achieve low and stable inflation and, as recognised by the International
Monetary Fund (IMF), "are well placed to conduct macroprudential policy because they have the
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capacity to analyse systemic risk."
The global financial crisis provided evidence of the need to contain risks to the financial system
as a whole through dedicated financial policies.
Against this background, many central banks that also have a mandate to promote financial
stability have upgraded their financial stability functions, including by establishing macroprudential
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policy frameworks. But to work effectively, macroprudential policy needs a strong institutional
foundation.
As advised by the IMF, "[t]he institutional setup should be strong enough to counter opposition
from the financial industry and political pressures and to establish the legitimacy and
accountability of macroprudential policy. It needs to ensure that policymakers are given clear
objectives and the necessary legal powers, and to foster cooperation on the part of other
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supervisory and regulatory agencies."
Moreover, we also need to keep in mind that safeguarding financial stability does not aim at
preventing bank failures in themselves.
Whereas the main focus of microprudential supervision is to safeguard individual financial
institutions from idiosyncratic risks and prevent them from taking too much risk, macroprudential
supervision takes into account the interactions among individual financial institutions, as well as
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the feedback loops of the financial sector with the real economy.
As recognised by the Single Supervisory Mechanism, "[b]anks can and should exit the market if
they are managed in a risky and unsound manner, or if they are structurally incapable of
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maintaining their competitiveness based on a sound business model."
In such cases, the authority entrusted with ensuring financial stability should be equipped with the
necessary instruments to safeguard confidence and ensure the financing of the economy is not
disrupted.
Post-global financial crisis, this has been achieved through the establishment of resolution
frameworks whereby the usage of public funds is minimised. New powers and tools have been
created and entrusted - in many cases to Central Banks - to ensure that critical operations of
banks can continue and value is preserved while losses are mostly absorbed by shareholders
and creditors with the aim of preserving financial stability.
New institutions have also been created. The creation of the European Systemic Risk Board
(ESRB), nine years ago, was a milestone in this respect.
In sum,
First, financial stability is inherent to the mandate of central banks;
Second, microprudential supervision is essential but not sufficient to safeguard financial
stability. Macroprudential supervision is also needed and it should be entrusted to the
entities that are better placed to assess systemic risks, i.e., the central banks;
Third, in order to conduct macroprudential supervision and succeed in their mandate
central banks need adequate instruments;
Fourth, financial stability is not about preventing bank failures, it is about safeguarding
depositors' confidence and preserving the regular financing of the economy. Adequate
resolution and liquidation frameworks, including access to public funds, are thus an
indispensable part of the crisis management toolkit.
It should also be noted that the low interest rate environment of recent years may require a more
active stance of the macroprudential authorities as it contributed to a build-up of vulnerabilities
and risks to financial stability.
Let me now turn briefly to today's programme. Since its inception, macroprudential policy has
gradually been implemented in Europe against a unique financial and economic background,
establishing itself as an autonomous economic policy area while interacting with other policy
domains.
This is a topic that will be addressed at this conference, in particular at the roundtable where the
interaction between macroprudential and microprudential policies will be dealt with.
This environment, characterised by crisis legacies, led, unsurprisingly, some macroprudential
policy authorities to postpone the use of macroprudential instruments included in the EU
legislation, or to gradually phase them in over time.
These decisions were taken against a regulatory framework that assigns some discretion to
macroprudential authorities allowing them to tailor their action to the specificities of each
country.
The discretion exercised by macroprudential authorities, together with the different risk
environments and institutional setups for macroprudential policy across countries, have led, as
expected, to some heterogeneity in the action taken by these authorities.
These differences are reflected not only on the type of instruments used, but also on the
methodologies, calibration and speed at which measures were implemented. But this is
precisely one of the positive features of the macroprudential policy: the adoption of measures
according to specific national circumstances.
Based on information gathered by the ESRB, macroprudential measures implemented in the EU
rose from 37 in 2014 to 58 in 2018. These data reflect the increasing intervention of
macroprudential authorities across Europe - where Portugal is also included - over the past five
years, setting the stage for the first session of today's conference.
In this session we will have the opportunity to discuss - benefiting from this increasing
experience - the challenges in assessing the effects of macroprudential policy, not only on the
financial system and on economic activity, but also on how it interacts with other policy fields.
Another interesting conclusion that can be drawn from ESRB data is that macroprudential
authorities have often preferred to use instruments targeted at credit standards, commonly
known as borrower-based measures, namely to address the systemic risk arising from
developments in the residential real estate market.
As we all know this risk has increased in the majority of the European countries, specifically in
some of the bigger cities, as also recently stressed by the ESRB.
Given the well-established interaction between real estate market and the banking sector, and
well-known underlying systemic risk, we dedicate a whole session of this conference to the
systemic importance of housing and mortgage markets and the transmission channels of related
macroprudential instruments. In view of the political dimension of some of these instruments,
something we all need to discuss is how best they should be designed and communicated to
inform public debate.
Finally, in the afternoon we will also focus on how the high levels of debt of non-financial
corporations may impair economic activity and financial stability. This is a topic that definitely
gets to the heart of some European countries given the underlying link with the significant
increase in non-performing loans during and in the aftermath of the global financial crisis.
Let me conclude.
Macroprudential authorities have been increasingly active in promoting financial stability, despite
facing multiple challenges throughout their relatively short existence.
However, the nature of these challenges has changed in tandem with the upturn in economic
activity, the strengthening of financial systems, the action taken by other policymakers and the
signs of a reversal in the financial cycle, the intensity of which is also conditional on each
country's specific situation
Heterogeneity between countries remains and is likely to continue in the future. That is why
macroprudential policy is foremost country specific. But this does not mean that we have nothing
to learn from each other. It is precisely the opposite, as today's conference programme will
show.
I would like to thank you all again for taking the time to join us here today. Many thanks in
particular to our speakers and session chairs. I wish everyone a very pleasant and productive
day, with insightful discussions both on and off the podium.
1
Draghi, M. (2019), "Macroprudential policy in Europe", Welcome remarks at the fourth annual conference of the
ESRB, Frankfurt am Main, 26 September.
2
IMF (2019), Monetary Policy and Central Banking Factsheet, 28 March.
3
IMF (2019), op. cit.
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IMF (2019), op. cit.
5
European Central Bank (2014), "Micro- versus Macro-prudential supervision: potential differences, tensions and
complementarities", Financial Stability Review - Special Feature C, May 2014.
6
European Central Bank Banking Supervision (2018), Statement on SSM risk appetite, 9 December, available at
www.bankingsupervision.europa.eu/about/mission-statement/risk_ap...