The latter are of particular interest to us considering that a task of the ECB, which is enshrined in the Treaty, is to contribute to the smooth conduct of policies by national authorities in the field of supervision and financial stability. Financial regulation and prudential supervision have a significant role to play in the financial system: to address market failures and safeguard financial stability.
Moreover, the model has the feature that this reach for yield can end badly, with a sudden and sharp correction in risk premiums that arises endogenously in response to a small tightening of monetary policy.