There is already some agreement on the need to have this new macro-prudential policy rest on two levels or dimensions. First, a cross-sectional dimension, focused on controlling the distribution of risks within the financial system at each point in time. This requires analysis of how institutions interact and what are the consequences of these interactions for the system as a whole. The aim should be to identify those interactions of most global systemic significance in order to subject them, logically, to more demanding soundness requirements. Further, macro-prudential policy should also heed the time dimension, which analyses how aggregate risk evolves and how it interacts with the normal functioning of the real economy. This is the perspective needed in order to design, for example, measures to temper the procyclical tendencies inherent in the financial system. As is known, the Banco de España was a pioneer in this field when, in 2000, it introduced dynamic provisioning. In the initial stages of the crisis the potential of such a tool was evident; however, the subsequent heightening of the crisis also showed its limitations. The interactions between monetary and macro-prudential policy will pose complex challenges to central banks. Theoretically, monetary policy should continue focusing on maintaining price stability; and macro-prudential policy, on ensuring financial stability. In practice, however, action by each of them will inevitably exert a strong influence on the objectives of the other, and that has implications for the institutional design of the macroprudential authority.

6  BIS central bankers’ speeches  necessary to steer the economy towards the “good” equilibrium. As a consequence, OMTs can succeed only if action is taken by governments, at national and at euro area level, to restore long-term growth and bridge fiscal and economic imbalances. The framework for OMTs is based on six main elements (see slide 10). First, strict and effective conditionality. A necessary condition for initiating OMTs is that a  Member State activates an appropriate EFSF/ESM programme, which envisages strict and effective conditionality spanning the fiscal, macroeconomic, structural and financial spheres. And the design of conditionality and the monitoring of such a programme can largely benefit from the involvement of the IMF. This is however not sufficient. The country also needs to maintain (at least some) market access. And this is signalled by the reference the ECB has made to the need for the EFSF/ESM programme to include the possibility of primary market purchases. In addition, and most importantly, the Governing Council maintains full discretion to initiate OMTs, focusing its assessment exclusively on monetary policy considerations. The second main element on which the framework for OMTs is based is a built-in exit strategy. OMTs will be terminated when one of the following conditions materialises. OMTs are no longer warranted due to threats to price stability; the aim of OMTs has been achieved; there is non-compliance with the conditionality established in the EFSF/ESM programme. This announced rules-based approach represents a way to address time inconsistency.