The experience of the financial crisis was not only an important trigger to set in motion supervisory and regulatory reform. It also drew attention to the need to develop comprehensive financial stability frameworks in which identification and assessment of system-wide risk are translated into macro-prudential policy action. Considerable efforts are being put in place at the European and global level in discussing such a framework and how to make it operational. Central banks, on account of their experience in financial stability should be important players in the macro-prudential analytical and policy fields, as reflected in the composition of the ESRB. This should not interfere with the primary responsibility of central banks, which should inflexibly remain the maintenance of price stability. To the contrary, the successful pursuit of the primary objectives of monetary policy and macro-prudential policy should reinforce each other. In particular, measures that enhance the resilience of the financial system or that address rising financial imbalances are likely to contribute to increase the effectiveness of monetary policy by reducing the impact of financial frictions on the supply of credit. Conversely, as demonstrated in the run up to the crisis, price stability is not sufficient to safeguard financial stability, but it is certainly a necessary condition for it. Indeed, it reduces the system’s vulnerability to the build-up of financial imbalances and the scope for risk mispricing. The financial crisis has well illustrated how the monetary policy transmission channel can be seriously hampered in the absence of financial stability.

Another important element of the Basel reform package is the introduction of a range of measures designed to mitigate the inherent pro-cyclicality of the financial system. In this context, mechanisms that enhance prudent and forward-looking provisioning of banks as well as the building up of sufficient capital buffers in years of economic expansion that can be drawn down at times of stress, are all under consideration. Overall, these measures aim at ensuring that the financial system functions as an absorber, rather than an amplifier of shocks, thus smoothing the volatility of the financial and real economic cycles. In setting up a more forward-looking provisioning framework, the Basel Committee works closely together with the accounting standard setters with a view to developing a sound operational framework for expected loss provisioning. In this context, let me mention as very important the collaborative efforts under way between the Basel Committee and the IASB to develop a revised expected loss model that proves operational. Concerning measures on capital buffers, the Basel Committee set forth a proposal on a capital conservation buffer that would establish certain restrictions for undercapitalised banks with regard to the distribution of earnings in the form of dividends, share buy backs and bonuses. In addition, the introduction of a counter-cyclical buffering mechanism is also considered. It would require banks to build up additional capital buffers when excessive credit growth is identified in the economy. The last topic I want to pay some attention to is the role of central banks in financial stability.