Yannis Stournaras: Financial stability, macroprudential regulation
and microprudential supervision
Welcome address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 1st Annual
Workshop of ESCB Research Cluster 3 "Financial stability, macroprudential regulation and
microprudential supervision", Athens, 2 November 2017.
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It is with great pleasure that I would like to welcome you to this first workshop of the ESCB
Research Cluster looking at issues related to financial stability, macroprudential regulation and
microprudential supervision.
Since 2008, the global financial crisis and the European sovereign debt crisis have had profound
implications for how central banks think about financial stability and the toolkits which are
employed in its defense. In the past, emphasis was placed on supervising individual institutions -
so-called microprudential supervision. The most obvious example of such supervision is that of
capital adequacy regulations which are harmonised across countries and have through the years
become ever more complex. However, discussions about how much capital banks should hold
and what counts as capital are still the subject of on-going research. Moreover, other supervisory
tools are being examined such as rules surrounding bank leverage and liquidity.
Perhaps, however, the most important challenge facing European banks is that of
nonperforming loans. There are two broad areas where research is needed.
First, how do we deal with the legacy NPLs, those that built up during the crisis? Questions
which arise include: what is the best way to reduce NPLs quickly? To what extent are there
issues of strategic default? What institutional reforms are required in the wider economy to
facilitate the smooth work-out of NPEs? What are the implications for financial conditions of
NPEs and the smooth transmission of monetary policy?
The second broad area is how we treat new NPLs going forward. Here I consider it important to
have some research input to issues such as appropriate provisioning policies and balancing the
need for provisions whilst at the same time not interfering too much with banks' ability to do their
job, namely, oiling the wheels of the real economy.
In addition to microprudential supervision, we can now add macroprudential regulation. This type
of regulation focuses on the stability of the financial system as a whole. Tools are used to try to
understand the build-up of systemic risk in order to provide early warnings and prevent systemic
crises. Interlinkages between financial institutions are mapped out in order to understand how
vulnerable the system is to a specific shock and the extent to which the shock will be contagious.
The input of research has been invaluable in guiding central banks and the output of the
Macroprudential Research Network (or MaRs as it was known) was surely vital in helping central banks
get macroprudential regulation up and running.
At the same time as research has been progressing, the institutional structure of regulation and
supervision has also undergone considerable reform. The European Systemic Risk Board was
created in the wake of the global financial crisis following the recommendations of the High Level
Group chaired by Jacques de Larosiere. The de Larosiere Report focused on the need to move
beyond microprudential supervision and give due attention to ensuring the stability of the financial
system as a whole. As part of the process of implementing its recommendations,
macroprudential regulation became a central bank core task. The research conducted in fora
such as this one provides valuable inputs to this work.
We have also seen major changes in the area of microprudential supervision with agreement on
the goal of European Banking Union and the creation of the Single Supervisory Mechanism and
the Single Resolution Mechanism. The Single Supervisory Mechanism seeks to provide a
consistent method of supervising 120 significant European banks. Once again research input is
crucial to building up that method. To reap the full benefits of these institutional changes, it is
important that the Banking Union be completed by creating a common Deposit Insurance
Scheme and setting up a credible common fiscal backstop to the Single Resolution Fund that
underlies the Single Resolution Mechanism. Perhaps strengthening the financial resources of the
ESM could provide a way forward in this respect.
Research Clusters were only recently set up by the Heads of Research in order to encourage
interaction and collaboration between ESCB researchers working on fields of common interest. It
is planned that each research cluster will have an annual workshop where papers, selected on
the basis of academic quality, will be presented and discussed. The workshops will provide an
opportunity for researchers from national central banks and the ECB to get together and discuss
advances in their respective fields - something that will have particular benefits for researchers
who work in smaller central banks. I trust that you will find the atmosphere at the first workshop
of this cluster conducive to encouraging such cooperation in order that policy in this area can
move forward. If the global financial crisis has taught us anything it is surely that we, as central
bankers, have a duty to preserve financial stability. Otherwise the costs for the real economy
and, ultimately, our fellow citizens are significant.