The bottom-up approach used in the context of the EU-wide stress test relies on banks’ own reporting of projections based on common scenarios and gives national supervisors and the ECB an important role with regard to quality assurance. Recent research provides tentative evidence that “supervisory scrutiny” relating to quality assurance has a disciplining effect on banks’ risk-taking. [6] We also need to understand how banks will react to the policy measures that are applied to them. A dynamic micro-founded structural model of bank behaviour examines changes in capital and liquidity requirements and confirms considerable heterogeneity among banks’ reactions. [7] Moreover, our 3D model, with default modelled in the household, non-financial corporations and banking sector, has been successfully used in various policy exercises and exemplifies how cutting-edge research can help inform policy decisions. [8]  The role of macroprudential policy So what is the role of macroprudential policy in the current environment? The financial crisis showed that macroprudential policy is needed to complement supervisory scrutiny by accounting for system-wide macro-financial feedback loops. Macroprudential policy is called to act countercyclically, tightening requirements when we see excessive risk-taking and loosening them to avoid a credit crunch when risks materialise. Since the crisis, the resilience of euro area banks has improved significantly and their capital level is currently considered to be adequate. However, in addition to the level of capital, also its composition deserves appropriate consideration.
We monitor all financial market data: equity prices, interest rates, capital flows. Corporate and sovereign debt markets are also important. What is going on there? We have seen a sharp increase in the risk premia that firms have to pay when raising debt on the markets. For high-risk firms in particular, these risk premia have shot up. Yields for countries such as Italy have also increased signficantly. We see a broad increase in risk premia. Another question that arises is whether the markets are still functioning. Is supply still matching demand? The central bank should intervene if liquidity dries up, that is if the markets suddenly seize up because of a lack of available liquid funds, or if the transmission of monetary policy is endangered, that is if our measures are not reaching the real economy. And that is exactly what we have been doing in greater measure since last Thursday. Our bond purchases have a stabilising effect on the market. US Treasuries have seen some severe temporary disruptions. There was a series of short intervals in which the trade in US Treasuries was disrupted. That’s a sign of considerable nervousness in the markets. Besides the markets, we are closely monitoring the situation of banks in Europe. We have taken measures to prevent banks from having to overly restrict their lending during the crisis. But the pressure on banks will intensify if economic conditions deteriorate. We are also closely watching investment funds. What is happening there?