The “exchange rate competitiveness” channel, through which monetary policy affects the exchange rate, meaning it changes the price of domestic goods relative to foreign goods. 3. The “financial channel”, through which monetary policy affects domestic financial conditions. When there are strong financial connections between countries, these conditions may change abroad as well. From these transmission channels, let me focus on the “financial channel” for the remainder of my talk. Financial spillovers from US monetary policy to the euro area Measuring international spillovers is not easy, because global shocks lead to economies moving in a synchronised manner for reasons unrelated to monetary policy.1 In line with previous evidence2, recent ECB research identifies large financial spillovers from US monetary policy to global financial conditions, including euro area financial conditions.3 More specifically, over the course of one month, monetary policy tightening by the Federal Reserve System drives up euro area corporate bond spreads4 just as much as US corporate bond spreads. It also triggers declines in euro area stock markets of a similar magnitude to the declines in US stock markets.5 However, the financial spillovers from ECB monetary policy to US bond spreads, or to foreign equity markets, are found to be less impactful. This asymmetry in the international impact of US 1/6  BIS central bankers' speeches  monetary policy and euro area monetary policy is rooted in the dominant role of the US dollar in global financial markets.

We are particularly concerned about spillover effects of macroprudential policies within the euro area, because the build-up of a capital buffer in one country should, to the extent possible, not impair the functioning of financial intermediation in other euro area countries. Conclusion Let me conclude by emphasising that, in a globalised and financially integrated world, the euro area is not immune to spillovers from other regions, in particular to shocks emanating from the United States. But we are convinced that we have the appropriate policy tools to largely shield the euro area economy and financial system from such spillovers. Monetary policy and macroprudential policy have different objectives and, therefore, different sets of policy tools. Cyclical factors, such as compressed interest margins, pose challenges to banks’ operating environment, but the gains have so far greatly offset the losses. In turn, euro area banks need to address their structural fragilities, which partially explain the very low price-to-book ratios of euro area banks when compared with their international peers. References Avdjiev, S., Bruno, V., Koch, C. and Shin, H. S. (2018), “The dollar exchange rate as a global risk factor: evidence from investment”, BIS Working Papers, No 695. Bernanke, Ben S. and Gertler, M. (1995), “Inside the Black Box: The Credit Channel of Monetary Policy Transmission”, The Journal of Economic Perspectives, Vol. 9, No 4, pp. 27–48. Borio, C. and Zhu, H. (2012), “Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?”, Journal of Financial Stability, Vol. 8(4), pp. 236–251.