Furthermore, banks and supervisors should analyse in far greater depth how the wide range of liquidity risks may crystallise, separately or conjointly, in a stressed market environment. Rigorous stress testing should span individual, group-wide and market-wide scenarios. There is considerable scope for much better consideration of likely system-wide interactions, including the potential impact of “crowded trades” being unwound, the dynamics of liquidity hoarding, and the risks of signalling weakness and thus losing market confidence and funding lines. Stress scenarios should test properly for the outright closure of funding markets, and explore the possibility of several markets being shut concurrently. Finally, testing should consider longer horizons, to cater for the possibility that a liquidity crisis could persist for some time. These are just some of the areas which could be considered in more detail – clearly banks, supervisors and central banks all have much to learn with regards to the design of appropriately demanding and comprehensive stress scenarios. Recent events have also highlighted the need to devise considerably tougher contingency plans. Closer integration with stress tests will help firms develop more reliable and robust responses to future episodes of strain. Experience has highlighted the need to improve resilience to a sharp decline in market liquidity and to demonstrate that firms can survive the closure of one or more funding markets by ensuring that finance can be readily raised from a variety of sources. Consideration should clearly be given to boosting holdings of very high quality liquid assets that can provide reliable reserves under all conditions.
Another relatively low-hanging fruit would be a common stabilisation fund equivalent to 1 to 2% of euro area GDP, which could provide us with a proper macroeconomic stabilisation capacity. I note that this largely converges with the Commission’s proposal to create a macroeconomic stabilisation function for the euro area. This common stabilisation fund would be used under efficient rules – but not conditional to an adjustment program, contrary to the ESM – to support, through loans, Member States’ counter-cyclical policies when they are faced with asymmetric economic shocks. The fund itself would be financed by borrowing. To definitely succeed in this ambition, the euro area will need a common keystone: an institution that fosters confidence. Because, as Tommaso Padoa-Schioppa put it: “ complete and systematic consistency of [national] policies achieved without any institutional infrastructure is a dream"8. This is why the new French President has proposed creating a euro area “finance minister”, which probably requires modifying the existing Treaties. This finance minister would embody and bring to fruition the shared commitment of our Member States. As I also mentioned this idea before9, let me share some personal views on the issue.