  as precaution against possible abrupt capital outflows (the “sudden stop” syndrome)    and, finally, to provide liquidity to domestic financial institutions. (Obstfeld et al. 2009). That use of foreign exchange reserves was especially apparent in 2008 when Central Banks in many emerging (and some industrialized) countries put those reserves at work to ease domestic tensions created by dollar liquidity shortages. The costs of holding reserves are also well identified:   intermediation of national savings by a public entity is never neutral. By nature, those entities don’t have the same risk appetite and liquidity preference as private agents. A significant part of national savings (up to 30% in some countries) might find itself subject to a “directed” allocation towards liquid instruments denominated in foreign currency.   as a consequence, there is a direct opportunity cost because foreign exchange reserves’ risk / return profile may be lower than for other, alternative, investments.   finally, as reserves accumulate, countries are getting increasingly exposed to exchange rate risk and face the possibility of significant valuation losses. This kind of cost / benefit analysis seems less and less able, however, to account for the true behavior of reserve holders. First there may be immeasurable, but very powerful, benefits such as increased security, lower external interest rates and lower exchange rate variability over the long run. Second, part of the costs may be borne by the system itself and not fully internalized by each individual country.
In particular, the Banco de España is now empowered to require that banking institutions establish countercyclical capital buffers by credit segment, limits on concentration in relation to economic activity sectors, and limits and conditions when underwriting new loans (in terms of loan-to-value, loan-to-income and debt service-to-income ratios, and also the maturity, the currency in which the operation is denominated and whether the interest rate is fixed or variable, among others). These new instruments complement those previously available to the Banco de España and included in the European legislation:11 the countercyclical capital buffer, the systemic risk buffer and the buffer for systemic banks, among others. In addition, this year saw the creation of the Macroprudential Authority Financial Stability Council, whose main goal is to contribute to the promotion of coordination and the exchange of information on financial stability issues among the Banco de España, the Ministry of Economy and Enterprise, the Spanish National Securities Market Commission and the Directorate-General of Insurance and Pension Funds). All in all, this new institutional setting is a significant step forward in reinforcing financial stability in Spain. 4. Other policies should also promote economic and financial stability The notion that other economic policies should complement monetary policy and also contribute to economic stability has always been embedded in the design of the European Economic and Monetary Union.