A couple of years ago, partly in response to some academic debate on the subject, the HKMA did in fact examine the case for the Exchange Fund to write currency options. We concluded as follows: "… the writing of currency options by the HKMA appeared to be technically feasible and might be consistent with currency board principles if properly designed ….. In theory at least, the writing of currency options by a central bank could be a useful tool in helping to stabilise exchange markets under certain conditions …. However, … the theoretical benefits seemed to be outweighed by the disadvantages … [including] the complications that the writing of options would bring to the currency board system, and the possibility of negative perceptions that the HKMA was engaging in risky activities or lacked the means to support the currency board system in the spot 2 market." The feasibility and advisability of using derivatives as a monetary instrument are subjects which have been debated over the years by academics and policymakers, and a few countries have relevant experiences to tell. A number of points seem worth making. First, in most instances, if you are confident in your monetary policy you should probably be up front in supporting it by your actions. If you don't possess sufficient resources for that support, you should certainly think twice before leveraging yourself in derivatives, even if it can be demonstrated that such a strategy might, if successful, be profitable - for the potential downside could be considerable.

This could foster further consolidation, including across borders, and address the problem of overcapacity in the euro area banking system. Assessing the financial stability of the euro area Beyond regular monitoring activities, financial stability analysis entails assessing the impact on the financial system of risks materialising, including risks related to international spillovers. Such assessments can also help inform the calibration of possible appropriate macroprudential policy responses. The stress-testing framework is an important analytical tool to quantitatively assess financial system vulnerabilities and risks. Stress testing exercises of the banking sector assess the sector’s resilience and how it performs under adverse circumstances, thus providing a measure of the severity of these risks. Individual bank results provide further information about banks’ potential capital needs. Stress tests can therefore show how the financial system will react when risks, such as those relating to spillovers, materialise. In order to enhance its stress-testing capacity, the ECB has invested in an analytical framework that not only tracks the resilience of the banking sector but also accounts for how it interacts with and feeds back in to the economy as a whole.8 This framework complements the EU-wide stress tests conducted under the aegis of the European Banking Authority (EBA), which are predominantly microprudential in nature. Our so-called macroprudential stress testing loosens the assumption that banks’ balance sheets are constant. As banks are hit by, say, negative (spillover) effects from the global environment, they may react by deleveraging their loan books.