The ECB is accountable for the achievement of this objective. All this is understood by other policy-makers. By acting in a transparent way consistent with its mandate, the ECB creates an environment of price stability within which other authorities can take decisions under their responsibility in order to achieve their own objectives. Clarity of responsibility, independence of action and accountability for decisions in an environment of open and frank exchange of information among policy authorities produces the best results. These principles can be readily applied to the relationship between monetary policy and macro-prudential policies. Of course, monetary policy decisions can have implications for financial stability. And the degree of freedom accorded by the medium-term orientation of monetary policy can be used to contain excessive risk-taking by banks. In this sense, monetary policy can support financial stability objectives without prejudice to its primary objective of price stability. But this does not imply that monetary policy should be held jointly accountable for maintaining financial stability, still less that it be assigned an additional financial stability objective. Such measures would only serve to obscure the accountability of monetary policymakers for price stability and dilute the accountability of those authorities responsible for financial stability. All this leads me to re-iterate my earlier conclusion: the primary objective of monetary policy must remain price stability. By contrast, the institutional structure for prudential supervision and regulation at the European level remains at an embryonic stage, especially on the macro-prudential side.

A “ratcheting-up” of risk within the banking sector can occur over time, creating increasing vulnerability. 17 Low interest rates also encourage a higher level of leverage. Because financial intermediaries – whether banks, broker-dealers, shadow banks, or hedge funds – finance themselves with short-term liabilities, central bank decisions on the level of short-term rate affect their marginal price of leverage. As a result, the behaviour of financial intermediaries – which, by their nature, have high levels of leverage – can be strongly influenced by even small changes in short-term rates. 18 Low levels of interest rates encourage higher levels of leverage and, as a result, an accumulation of additional risk on bank balance sheets. Through all these channels, a prolonged period of low short-term interest rates can support the accumulation of risks and financial imbalances on the balance sheets of both financial intermediaries and the private sector. These imbalances render the economy vulnerable to financial crises: if confidence evaporates, lenders call in loans, balance sheets contract and a painful readjustment is required, with adverse implications for financial stability and the real economy. In particular, the build-up of leverage within the financial sector may unwind abruptly, leading to a tightening of overall financing conditions. 19 Such thinking sheds light on recent developments in the run-up to the financial crisis. Viewing the impact of globalisation on goods prices as the manifestation of a positive supply shock, we can map this abstract scenario into our experience of the past decade.