The literature has identified three broad sources of systemic risk: (i) macroeconomic shocks that are significant enough to cause distress in the financial system, (ii) the unwinding of imbalances in the financial system generated by excessive leverage, and (iii) contagion risk, created by increasing interconnectedness and herd behaviour. Whatever the origin, the primary role of macroprudential authorities is to identify, measure and reduce systemic risk. Identification of risks clearly needs to be probabilistic, attempting to predict the level of overall risk of the system in different scenarios. Many indicators to measure systemic risk have been proposed since 2008. Many of them though, have a “micro-level” dimension dedicated to calculate the contribution of significant institutions to systemic risk. The Marginal Expected Shortfall (MES), CoVar, CoRisk or Conditional Tail Risk (CRT), for example, fall under this category. 3 Taken in isolation, they are not useful to predict future levels of systemic risk, as they tend to use contemporaneous market prices and do not consider the system as a whole. The ECB has developed a Composite Indicator of Systemic Stress (CISS) 4 that comprises five aggregate market segments accounted for by a range of variables and time-varying rank correlations between them. More recently, the CISS indicator has been used by Hartmann et al. (2015), jointly with credit to the private sector and cycle variables (industrial production, inflation and a  1  Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.

However, regarding loans for housing, policy tools such as Loanto-Value or Debt-Service-to-Income (LTV or DSTI) ratios, need to be part of the macroprudential toolkit in order to effectively reign on or, at least, influence real estate asset prices, as these are among the most important drivers of the financial cycle. The announced revision of the CRDIV/CRR should provide an opportunity for the extension of the available instruments, as LTVs and DSTIs are not included in the current EU regulation. Clearly, measures addressing the credit supply side by banks – such as increased capital requirements, counter-cyclical capital buffers or dynamic provisioning – can be easy to activate but have proven to be of modest effectiveness. Furthermore, as non-banks play an increasingly important role in the provision of credit, measures targeting only the banks could just result in shadow-banks taking a considerable size of the mortgage business and fuelling a boom in house-prices. Fourth, stress tests of the banking and financial system must have a macroprudential dimension. Such comprehensive assessments need to be embedded in a macro-financial environment. They entail an assessment of the position of a specific economy in the financial cycle since, for example, the adequate level of capital requirements cannot be dissociated from a country’s position on the cycle. Fifth, macroprudential policy is complementary to monetary policy and should share the same status as a policy area. Central banks must have responsibilities in both policy areas even if they are not involved in microprudential supervision. Several reasons justify this set-up.