Another important development has been the improved sophistication of a macro-prudential function developed by Central Banks, Supervisors and International Institutions to analyse and monitor all the major risks at the level of the system as a whole. The use of models of the financial sector allows the simulation of various shocks to conduct stress tests at that level.
This is another item currently on the Basel Committee’s agenda. There is no regulatory or economic justification for such preferential treatment. The sovereign debt crisis that swept across the euro area made it crystal clear just how risky the nexus between sovereigns and national banks can be.