The bottom-up approach used in the context of the EU-wide stress test relies on banks’ own reporting of projections based on common scenarios and gives national supervisors and the ECB an important role with regard to quality assurance. Recent research provides tentative evidence that “supervisory scrutiny” relating to quality assurance has a disciplining effect on banks’ risk-taking. [6] We also need to understand how banks will react to the policy measures that are applied to them. A dynamic micro-founded structural model of bank behaviour examines changes in capital and liquidity requirements and confirms considerable heterogeneity among banks’ reactions. [7] Moreover, our 3D model, with default modelled in the household, non-financial corporations and banking sector, has been successfully used in various policy exercises and exemplifies how cutting-edge research can help inform policy decisions. [8]  The role of macroprudential policy So what is the role of macroprudential policy in the current environment? The financial crisis showed that macroprudential policy is needed to complement supervisory scrutiny by accounting for system-wide macro-financial feedback loops. Macroprudential policy is called to act countercyclically, tightening requirements when we see excessive risk-taking and loosening them to avoid a credit crunch when risks materialise. Since the crisis, the resilience of euro area banks has improved significantly and their capital level is currently considered to be adequate. However, in addition to the level of capital, also its composition deserves appropriate consideration.

SPEECH  Welcome remarks Remarks by Luis de Guindos, Vice-President of the ECB, at the fourth annual ECB macroprudential policy and research conference Frankfurt am Main, 16 December 2019 I am delighted to welcome you all to the fourth annual ECB macroprudential policy and research conference. This conference is held annually to ensure that we meet regularly and advance our understanding of macroprudential policy. This year’s focus is on monetary policy and financial stability as it represents the conclusion of the ECB’s Research Task Force dedicated to this topic. In my remarks today I will cover three aspects of macroprudential policy and research. First, I will reflect on the economic and financial conditions that may represent challenges for macroprudential policy. Second, I will focus on selected achievements at the ECB in advancing the research frontier. Finally, I will address the need of rebalancing capital requirements towards releasable buffers to allow macroprudential authorities to act more effectively in a countercyclical manner especially in adverse economic conditions. Macroprudential policy in a changing environment The current environment is characterised by a weakening of the macroeconomic outlook and increasing uncertainty, even though the latest indicators point to a stabilisation of economic activity. The associated low-for-longer interest rate environment is likely to put pressure on bank profitability. Weak profitability and squeezed margins pose a risk to financial stability as they may hamper banks’ intermediation and capital generation capacity. It is thus important to assess the interaction of monetary and macroprudential policies while respecting their individual mandates.