yves mersch : oral hearing of the federal constitutional court 16 february 2016 in the omt proceedings introductory statement of the european central bank by mr yves mersch, member of the executive board of the european central bank, at the oral hearing of the federal constitutional court in the omt proceedings, karlsruhe, 16 february 2016. * * * mr chairman, distinguished members of the second senate, introduction you have once again invited the european central bank to provide its opinion, as an expert third party, on the decision of the governing council of the european central bank of 6 september 2012, whose compatibility with national constitutional law you are reviewing in these proceedings. this is the decision that approves the main parameters of the eurosystem ’ s outright monetary transactions on the secondary market for government bonds – so - called omts. i am happy to accept this invitation. what has changed since the last oral hearing on 11 june 2013? the court of justice of the european union has, on the basis of the facts provided by you, responded to the questions submitted to it for a preliminary ruling. the court of justice of the european union, which is competent under the treaties to interpret union law and the validity of the acts of the union ’ s institutions, including the european central bank, found omts to be compatible with union law : the european central bank did not exceed its monetary policy mandate either as regards the conditionality, the selectivity or the parallelism of omts nor as a circumvention of the limits and conditions laid down by the assistance programmes of the european stability mechanism – the so - called esm. the court of justice of the european union followed the arguments put forward by the european central bank and confirmed that omts in view of their objectives and the instruments provided for achieving them, fall within the area of monetary policy and therefore within the powers of the eurosystem. monetary policy measures, such as omts, may have indirect effects on the stability of the euro area, without this leading to monetary policy measures being treated as equivalent to economic policy measures. the fact that the european central bank will take an independent monetary policy decision on the implementation of omts also excludes the possibility that the esm ’ s assistance programmes were circumvented. the court of justice of the european union also confirmed that omts are proportional and that the european central bank, as regards the judicial review of these conditions, should be granted a broad discretion. as a result the european central bank was

the failure of other intermediaries. the second one emerges from imbalances that build up over time, such as credit booms or concentrations of lending in certain regions or sectors. these “ bubbles ” can go on profitably for most participants who “ ride ” them for quite a while. then relatively small events or changes in expectations can lead to their breakdown, simultaneously bringing down a wide range of intermediaries and markets. 8 the third way in which systemic risk can materialise relates to economic downturns or other aggregate shocks that cause the collapse of a wide range of intermediaries and markets simultaneously. 9 other important elements in systemic risk include the strong information intensity of financial contracts and transactions, and a high degree of connectedness between financial intermediaries and markets as well as a strong reliance on debt financing ( leverage ) and on maturity mismatches between assets and liabilities. these factors imply feedback mechanisms that amplify shocks and can lead to non - linearities in the financial system that then are easily transmitted to the real economy. systemic stability, or the absence of systemic risk, can be seen as a public good, thereby legitimising the role of governments and other authorities in addressing it. 10 like pollution, systemic risk involves externalities, in the sense that each financial intermediary manages its own risks but does not consider its impact on the risk of the system as a whole. the financial crisis contributed considerably to a better understanding of the phenomenon of systemic risk, which is also reflected in aspects of regulatory reforms. in particular, the possibility of aligning capital requirements to a measure of firms ’ systemic risk contribution is being contemplated by regulators, e. g. the basel committee on banking supervision. 11 how could the esrb then structure its supervisory work on systemic risk? in broad terms, systemic risk analysis can be broken down into two core components : i ) surveillance, or risk detection, and ii ) risk assessment, each of which i will address in turn. risk detection financial stability surveillance concerns risk identification. this kind of surveillance mainly aims to detect potential sources of risk, especially financial vulnerabilities – that is weaknesses which, if unearthed, could lead to a disruption or failure in part of the financial de bandt, hartmann and peydro - alcalde ( 2009 ), “ systemic risk in banking : an update ”, forthcoming in the ecb working paper series, and berger, molyneux and wilson ( eds. ), oxford