, in particular with monetary policy. 3. consideration also needs to be given to the potential for regulatory arbitrage. pursuing macro - prudential policy action is likely to require a great degree of international coordination, in order to keep the scope for cross - border and crosssector arbitrage contained. this aspect is particularly important within the european union ( eu ) which is characterised, among other things, by a high degree of policy harmonisation in the financial sector. 4. furthermore, given the fact that the framework for macro - prudential analysis and policy is presently only at a formative stage of development, the need for reflection on the risks of unintended consequences is key, as formulating policies that are aimed at safeguarding financial stability may create vulnerabilities further down the road. iv. the establishment of the esrb as part of the reform of the eu supervisory framework one of the main lessons from the financial crisis concerns the necessity of a framework for monitoring the various sources of systemic risk and assessing their consequences for the financial system in a comprehensive and timely manner. therefore, there is an agreement at international level about the need to strengthen the macro - prudential approach to regulation and supervision of the financial system as a whole. so far there has not been in europe an authority able, both from an institutional and operational point of view, to conduct a comprehensive financial stability assessment covering the whole eu financial sector. apart from the financial stability assessment conducted by individual central banks, the only area - wide comprehensive assessment is contained in the financial stability review, which is prepared by the ecb and focuses on the euro - area. moreover, europe has lacked a framework that could allow translating warnings about possible building up of systemic risks in certain components of the financial sector into concrete policy actions by competent supervisory and regulatory authorities to address such risks. the need to address such gaps prompted important decisions in the eu with the objective of establishing a new framework for macro - prudential oversight at eu level. following last week ’ s approval by the european parliament of the relevant legislative proposals, this institutional lacuna will be filled at the beginning of 2011 with the establishment of the european systemic risk board as a new eu body responsible for conducting macro - prudential oversight at the european level, with the conferral of specific supporting tasks on the ecb. this is part of a broad comprehensive review of the eu institutional framework for supervision, which includes also the enhancement of micro - prudential supervision

jose manuel gonzalez - paramo : the european experience on macro - prudential regulation speech by mr jose manuel gonzalez - paramo, member of the executive board of the european central bank, at the i jornada financiera banco central de bolivia, la paz, 29 september 2010. * * * i am grateful to ines cabral and fabio recine for their contributions to this speech. i. introduction it is a great pleasure for me to be today in la paz to participate in this important event organised by banco central de bolivia. in the course of my presentation i will try to illustrate our approach to the concept of macro - prudential regulation and oversight, a new policy area where central banks are expected to play an important role. my remarks are organised in three main parts. i will start by justifying the need to develop a macro - prudential policy framework. i will then move on to reflect on what we mean by macroprudential oversight. finally, i will elaborate more in detail on the establishment of the esrb as part of the reform of the eu supervisory framework, and briefly touch upon other reform initiatives in europe. ii. why we need to develop a macro - prudential policy framework? the global financial crisis has unearthed fragilities in a range of policy areas which have prompted a careful review of main policy objectives and instruments. this applies to the field of micro - prudential regulation and supervision, which failed to ensure that financial institutions had sufficient capital and liquidity to cope with the financial shock. it also applies to the field of tax policy, in both financial and non - financial sectors of the economy, which might also have contributed to the build up of imbalances and financial vulnerabilities that later on worked as amplifiers of the financial strains. monetary policy, and the extent to which policy interest rates could be used to “ lean against the wind ” of financial market excesses in an effective manner, which is consistent with the preservation of price stability over a longer term horizon, has also been under debate. but the area which has been under the spotlight, as the financial crisis unfolded, has been the one of macro - prudential policy. the global financial crisis has disclosed the scale of the potential fallout from the failure of large financial institutions. it has revealed the fragility of the financial system to features and trends that cut across institutions, markets and infrastructures, namely in the form of financial imbalances.