vitor constancio : regulation and financial stability introductory statement by mr vitor constancio, governor of the bank of portugal and candidate for vice - president of the european central bank ( ecb ), to the economic and monetary affairs committee of the european parliament, brussels, 23 march 2010. * * * i am honoured to appear before your committee for this hearing which is part of the process of my nomination to the vice - presidency of the european central bank. on my recent appearance before your committee for an informal exchange of views i had the occasion to summarize in my introductory statement my positions on some of the more important problems related to monetary policy. i expressed my views on the nature of the ecb ’ s mandate ; the meaning of the secondary objective as stated in the treaty ; the main points of our monetary strategy, the role of financial stability and asset prices in monetary policy and, finally, i discussed my assessment of inflationary risks in the present situation. it is not my intention to cover these subjects in my statement today but in view of their importance i want to suggest that my written introductory text to the previous informal session could be annexed to the present proceedings. today i would like to concentrate my initial comments on matters of regulation and financial stability. as i mentioned last time, “ the need to avoid disruption to the proper functioning of the financial system also confronts monetary policy. it is a problem that cannot be ignored by central banks as financial institutions are essential for the economy and for the transmission of monetary policy itself ”. the recent crisis is an example of the massive turbulence that the financial sector can create endogenously with devastating consequences to the economy. we must be aware of the main lessons to be drawn from the crisis : a ) the financial sector is not self - equilibrating or self - correcting ; b ) an unfettered financial sector can generate crisis on its own ; c ) extended periods of high growth of credit and debt generate asset price booms that always end in a crisis ; d ) low inflation in the market of goods and services is not enough to guarantee financial stability. human societies have learnt and forgotten these lessons several times throughout history. misbehaviour of big financial institutions, deregulation and perverse incentives created this time the perfect storm that will continue for a protracted period of time to cause slow growth and severe unemployment. so, the question now is the following : can we devise the instruments and institutions necessary to tame the

legislative proposals, although there is no international consensus to achieve a more harmonized regime that could be relevant for cross - border institutions. all these measures seem to be useful and complement the other instruments already mentioned to rein in excessive growth and unduly risky behaviour of major institutions. the fourth and final problem that is not yet completely solved refers to crisis resolution of cross - border institutions in the european union. the creation of colleges of supervisors and the possible role of the esas in acting as mediators will make a contribution to find coordinated solutions to the problem. the main obstacle is related to the problem of burdensharing of costs in dealing with crisis resolution. as i wrote in my answers to your questionnaire : “ in my view, any potential move towards an even more integrated supervisory architecture in europe will therefore have to be preceded by the establishment of a european safety net ( including an ex - ante funded resolution fund ) ”. the commission has been doing good work in this area and the announcement made last friday by commissioner barrier goes in that direction and is very important. nevertheless, let me point out that a full solution and the operation of such a fund requires higher harmonization of national resolution regimes including bankruptcy laws, and this will prove to be difficult. nevertheless, i believe that full european financial integration requires a common european resolution regime. a final thought about the overall impact of all the envisaged regulatory reforms. some commentators make the criticism that all the measures at stake could amount to a sort of overkill that may possibly choke financial activity. in view of the extreme seriousness of the financial crisis engineered by the financial sector i think that there is no exaggeration in the re - regulating efforts being prepared even if they were fully implemented – something about which one may have doubts. there is nevertheless a risk to be avoided concerning the timing of the implementation. an immediate or quick implementation of all the measures, in particular those related with higher capital requirements, could generate credit supply restrictions detrimental to economic recovery. this implies that all authorities concerned should be as clear - headed and resolute regarding content of the reforms as they must be wise and prudent in timing their implementation.