The ultimate objective of macroprudential policy is to preserve financial stability. This includes making the financial system more resilient and limiting the build-up of vulnerabilities, in order to mitigate systemic risk and ensure that financial services continue to be provided effectively to the real economy.
Containing systemic risks
Systemic risks can arise from severe macroeconomic shocks, financial imbalances, including excessive credit growth, leverage and maturity mismatches, and contagion effects.
In order to contain systemic risks, macroprudential policies seek to:
- prevent the excessive build-up of risk, resulting from external factors and market failures, to smoothen the financial cycle (time dimension)
- make the financial sector more resilient and limit contagion effects (cross-section dimension)
- encourage a system-wide perspective in financial regulation to create the right set of incentives for market participants (structural dimension)
Instruments
The SSM Regulation assigns macroprudential powers to both the national authorities and the ECB, so responsibility for macroprudential policies is shared (Article 5). Macroprudential policy instruments can be distinguished along three lines:
- capital-based measures
- borrower-based measures
- liquidity-based measures
These instruments make the financial system more resilient by increasing capital and liquidity buffers. Examples include capital buffers for global and other systemically important institutions, the liquidity coverage ratio and the net stable funding ratio. National authorities and the ECB can impose countercyclical buffers to counter the cyclical build-up of systemic risks. Wherever available within the national framework, national authorities can also impose borrower-based measures that restrict lending, namely for mortgages, at the level of the individual borrower.
Macroprudential policy interactions
Macroprudential policy cannot be considered in isolation; there are important interactions between microprudential, macroprudential and monetary policy measures.
Interactions with monetary policy
Monetary and macroprudential policies interact with each other mainly via their common transmission channel through the financial system, and especially through the banking system. The two policy domains can complement each other in ensuring both price and financial stability.
Macroprudential instruments can be used in a selective and targeted manner to contain financial stability risks, even in an economic environment characterised by low inflation. The euro area institutional setup allows the ECB to reap the benefits of a common information set and consistent analytical framework.
Interactions with banking supervision
Microprudential supervision and macroprudential policy complement each other through their differing focus. Microprudential policy increases the resilience of individual financial institutions, while macroprudential policy enhances resilience against risks that emerge for the financial system as a whole.
Regular meetings of the Macroprudential Forum bring together the ECB’s Governing Council and the Supervisory Board to maintain a common understanding of the situation in the financial sector.
