pedro duarte neves : financial stability and macro - prudential policy concluding remarks by mr pedro duarte neves, vice - governor of the bank of portugal, at the conference on “ financial stability and macro - prudential policy ”, lisbon, 10 february 2015. * * * contributions to these concluding remarks from the financial stability department of banco de portugal and, in particular, from rita bessone basto are gratefully acknowledged. it ’ s up to me to close this conference and i will start by thanking all participants for making this conference a success in bringing out such important issues for financial stability and macro - prudential policy. the fruitful and stimulating debates we had all day, will certainly make my task, of drawing some conclusions and policy messages, considerably easier. the implementation of macro - prudential policy requires the early identification of risks and their systemic impact, the definition of appropriate and correctly calibrated instruments to mitigate these risks and a governance capable of taking decisions whenever necessary, independently of lack of public support or of possible conflicts with other policies. there are challenges inherent to all these tasks and my remarks will dwell upon them. identification of systemic risks an analysis allowing a timely identification of risks and their impact is thus a critical aspect of macro - prudential policy. as shown today by marco espinosa vega, the complex network of interconnectedness in the financial system can make risks more difficult to detect but very easy to propagate within the system. in addition, it is now clear to us that financial vulnerabilities have a tendency to accumulate during the expansionary phase of the credit cycle. lower credit risk and higher valuation of collateral assets during the expansion of the cycle contribute to credit growth and to increase asset prices. these self - fulfilled dynamics can easily give rise to excessive leverage and speculative bubbles. tackling those risks demands a robust analytical framework. these characteristics of systemic risks also imply a two dimensioned policy. a structural, transversal component, which analyses the distribution of risks and interconnectedness in the system in order to mitigate risks in a given period of time, and a cyclical component, which analyses the evolution of these risks during the expansionary phase of the cycle and intervenes with the purpose of providing the system with a greater capacity to absorb losses during the downturn ( i. e. leaning against the financial cycle ). recently, there has been a considerable volume of research on the measurement of systemic risks,

for coordination also encompasses different regulators at the national level in order to address risks that stretch across regulatory and supervisory perimeters. exposures of the banking sector to the shadow - banking sector and misconduct ( i. e. misselling of financial products, market manipulation, rule completion breaches or money laundering ) require that banking, insurance, market, and other regulators work closely together to develop coordinated tools to address macro - prudential risks. this joint effort is, however, at an early stage, given the diversity of mandates and governance structures among regulators. in addition to coordination issues, there are many aspects inherent to macro - prudential policy, which constitute a challenge to governance. the preventive nature of macro - prudential policy implies the activation of instruments at a stage where risks have not yet materialised. as this policy would contribute to reduce economic activity at a time when risks are not yet perceptible, public support for policy implementation may be low. on the other hand, limiting the amplitude of the financial cycle during a downturn normally implies the imposition of less strict regulatory requirements at a time when risks are evident. this may lead markets to question the resilience of the financial system and cause a possible conflict with the immediate objectives of micro - prudential policy. bis central bankers ’ speeches furthermore, the wide scope of its main objective – financial stability – and the lack of clear metrics for its measurement also raise issues concerning the accountability of macroprudential policy. as opposed to monetary or fiscal policies, the results for which the policymaker should be held accountable for are less clear. the efficacy of a policy measure in preventing a crisis cannot be verified either – a crisis that has not occurred does not usually leave a trace. therefore, in addition to a governance ensuring independence and legitimacy of the macroprudential authorities, it may be important to establish a mechanism limiting a possible inaction in the presence of future vulnerabilities. in this context, following a esrb recommendation, several macro - prudential authorities, including banco de portugal, have recently publicized their “ macro - prudential toolkits ”. these toolkits, by establishing a clear framework defining the goals of macro - prudential policy, the set of instruments available to target various types of relevant risks and the conditions for their activation ( normally guided by a set of relevant indicators ), can confer greater predictability and transparency to macroprudential policy. in addition,