This is why all countries have institutions entrusted with ensuring financial stability is maintained and, in particular, with taking macroprudential policy decisions. In Spain’s case, and in relation to the banking system, it is the Banco de España —as part of the related European mechanisms— that performs these functions. Financial stability and macroprudential policy The financial system plays a key role in the economy – namely financial intermediation – which, moreover, affects all sectors: households, firms, government, financial firms themselves, etc. The markets and intermediary companies that comprise the financial system raise funds from economic agents with surpluses (savers) and distribute them among those that need to finance investment projects or consumption decisions (debtors). Hence the name financial intermediation, since the financial system acts as a bridge between savers and debtors. Hence, by “financial stability” we understand that situation in which the financial system is capable of withstanding shocks without disruption to the financial intermediation process on a sufficiently serious scale as to adversely affect real economic activity. Given the importance of this intermediation, our modern societies have equipped themselves with a regulatory and supervisory framework for banks and financial activities that seeks to ensure financial stability. In this respect, before the global financial crisis that struck the world economy more than a decade back, it was considered that, to achieve the objective of a sound, safe and stable financial system, it sufficed to ensure the solvency of each financial institution individually.

These restrictions thus operate by strengthening the borrower’s solvency and, thereby, limiting the potential losses that banks would subsequently have to bear. 10  These restrictions are solely applicable to banks’ new lending business; hence, immediately, their introduction causes banks to restrict the supply of credit. And this prompts an immediate effect on households’ and firms’ consumption and investment decisions. These agents will presumably reduce their level of spending and, consequently, their demand for credit. Also, financial and real asset prices will be adversely affected by the lower level of spending and by the expectations channel, reducing the collateral available. These effects feed into each other, further reducing credit supply and demand. Selecting the specific characteristic of loans that will be subject to limits at each point in time will depend on the situation we are in; in particular, on the level of and developments in loans already granted. This is without ruling out the possibility that limits will have to be set on several characteristics simultaneously, since the evidence available shows that, when easy conditions are observed in several of these characteristics, there is usually a more than proportionate increase in the probability of default. Moreover, when only one of the characteristics is limited, it is usual for another characteristic to become looser, lessening the impact of the limit imposed [see, for example, Tzur-Ilan (2017)]. This type of tool is not harmonised at the international level or in the EU, and some countries use them mainly on mortgage loans to households.