19 This supports the idea that central banks should use monetary policy to stabilise the general price level over the business cycle and macro-prudential policy to prevent the build-up of risk over the financial cycle. However, the macro-prudential instruments currently available to the ECB mainly operate through their effect on banks.
The extent to which those instruments can smooth the financial cycle crucially hinges on the importance of the banking sector relative to shadow banking in driving financial fluctuations, notably credit and asset price developments. A limited role of shadow banking would reinforce the motivation for the use of banking regulation as a dedicated policy tool to address financial instability.