Some countries, for example, try to internalize the costs of registering subsidiaries as branches by increasing depositor and retail consumer legal protection through an option for retail clients to cancel  24  Praet, P. (2015): Structural reforms and long-run growth in the euro area, intervention on the panel “Long-run growth, monetary policy and financing of the economy” at 43rd Economics Conference of Oesterreichische Nationalbank, Vienna, 15 June 2015. 25  European Central Bank (2015): A framework for analysing and assessing cross-border spillovers from macroprudential policies, Financial Stability Review, Special features, May 2015. 26  Czech National Bank (2014): Box 7: Fragmentation, Ring-fencing of Local Activities and Foreign Bank Branches, Financial Stability Report, 2013/2014. 27  Recommendation ESRB/2015/2 on the assessment of cross-border effects of and voluntary reciprocity for macro-prudential policy measures. BIS central bankers’ speeches  7  liability/claim without penalty, extraordinary contributions to deposit guarantee systems, etc. The potential for intra-banking-group arbitrage could also be diminished if a macroprudential measure is applied at the appropriate level of consolidation and/or exposure location, making reciprocity arrangements a necessary condition for mitigating these effects. Since it may be difficult to simultaneously hit macroprudential and monetary objectives due to the general low degree of synchronisation between real and financial cycles, the policy coordination of the two is an essential prerequisite for simultaneously stabilizing the general price level and financial movements as there are “important synergies and interactions between the two policy functions” (Constancio, 2015).

While the nature of shocks and propagation mechanisms still largely remain on the battlefield of economic theory, empirically observed patterns and the consequences of the materialisation of risks necessitate our reaction, which should be based on our best knowledge and abilities. Allow me to get into more detail here. Optimal policy responses in a multi-country setting require a careful examination of real and financial cycles, both domestic and international. For that purpose, let us look at five important patterns that seem to characterise them. First, financial cycles seem to have a lower frequency and higher amplitudes compared to standard business (real) cycles. Credit and asset price cycles may take long to develop their potential to destabilize the financial system. Further on, such a potential may emerge regardless of watchful micro-prudential supervision or stable inflation. The resulting notion of systemic risk may be identified as the interplay of macroeconomic shocks that make financial sector vulnerable, the contagion resulting from financial interconnectedness and endogenous financial imbalances associated with credit booms, credit leverage and risk taking behaviour of financial institutions 3. Second, there are still no mechanisms in place to engineer sustainable synchronisation of cyclical movements across Europe. The question of cyclical synchronisation arises as particularly important within the international setting. This is the factor that makes policy responses even more complex, especially within a currency union such as the euro area, where the damage of suboptimal policy responses might exceed mere fiscal costs and output losses – they may threaten the future of the euro itself.