peter praet : monetary policy in the context of balance sheet adjustments speech by mr peter praet, member of the executive board of the european central bank, at the peterson institute for international economics, washington dc, 22 may 2013. * * * i would like to thank federic holm - hadulla and massimo rostagno for their contribution to preparing this speech. slides to the presentation can be found on the ecb ’ s website. ladies and gentlemen, it is a great pleasure to speak to you today. i would like to use this opportunity to discuss the ecb ’ s monetary policy response to the profound balance sheet adjustments currently taking place in the euro area. like in most developed economies, different sectors in different euro area countries have entered into a deep deleveraging phase over recent years. a deleveraging phase follows a credit boom gone into reverse : financial and non - financial firms shift their focus from exploiting business opportunities to reducing risk exposure. likewise, households seek to clean their balance sheets from sources of vulnerability. deleveraging presents central banks with a delicate balancing act : • it is a necessary and healthy reversal of past borrowing excesses. to that extent, policy - makers should not stand in the way of “ the invisible hand ” ( or perhaps, more fittingly, “ the invisible scissors ” ) that trims balance sheets to sustainable proportions. unless the oppressive load of debt and capital overhangs is run down, the misallocation of resources will constrain future opportunities. solving a stock problem today means resolving a chronic flow problem – anaemic income, production and expenditure – for years to come. • at the same time, deleveraging carries risks if it is abrupt and disorderly. accelerated deleveraging by the financial industry brings with itself the threat of a protracted suspension in financial intermediation. in a worst - case scenario, this can lead to a fully - fledged financial meltdown. but, even if the meltdown scenario is avoided, lack of finance adds to the economic headwinds by suppressing investment. sluggish investment, in turn, lowers income and prices, thus reinforcing deleveraging pressures. if this cycle of adverse externalities across sectors sets in, the ensuing deleveraging spiral becomes a matter of public policy concern. it becomes a monetary policy concern to the extent that it impairs the transmission of monetary policy signals to the real economy. central banks thus have a role to play in

. beyond all these aspects that are usual in respect to supervisory authorities, there are two other points i would like to underline. the first refers to the so - called early intervention powers as they are foreseen in the draft directive about bank resolution that should be approved in the near future and long before the ssm will start operating. these early intervention are vast in what concerns the governance and scope of activity of institutions bis central bankers ’ speeches that start to have problems that can lead them to a point of non - viability. as such, these powers are related to what is usually called “ prompt corrective action ” regarding problematic banks and can be applied before the bank is delivered to the resolution authority. another important competence conferred upon the ecb as the centre of the ssm concern the macro - prudential instruments to be possibly applied both to the euro - area financial system as a whole or to individual countries. these powers are shared with national authorities that can also take measures in this field but it is nevertheless another essential element of the proposal. the crisis has shown that supervising the micro - prudential risks at individual banks separately is not sufficient and that macro - and micro - risks can actually be mutually reinforcing. involvement of non - euro area member states a third important feature of the ssm relates to the preservation and deepening of the single market, particularly the fact that national competent authorities of non - euro area member states have an option to participate in the ssm. they can participate through establishing a close cooperation with the ecb. by giving non - euro area member states full membership and voting rights in the supervisory body, the body responsible for the preparation of decisions on supervisory matters, they are placed on an equal footing with euro - area member states. however, as the ecb governing council is the ultimate the decision - making body of the ecb, its role in the ssm is reduced to the possibility of accepting of accepting or rejecting the decisions of the supervisory board. at the same time, a system integrating a mediation panel is foreseen in the regulation in case of divergences that may involve a noneuro area member state. all these mechanisms were accepted at the level of the council by all governments which seems to indicate that we might see an extension of the ssm well beyond the euro area. separation of monetary and supervisory functions, while benefiting from synergies a final feature of the ssm regulation i would like to highlight relates to the principle