The first of these measures consists of a permanent increase in the risk-weighting11 for the loan tranche exceeding the 80% loan-to-value ratio. The second  9  Taxonomy as proposed in De Nicolò et al (2012). For an overview on macroprudential instruments and international experiences, cf. CGFS (2010). 10  Over the past three years, annual real growth amounts to, on average, 4.4% (houses) and 5.5% (apartments). Annual real mortgage growth over the past three years amounts to, on average, 4.8%. 11  The risk-weighting is increased from 75% to 100%. 4  BIS central bankers’ speeches  measure requires a 100% risk-weighting for new mortgage loans which do not meet tighter minimum requirements stipulated in the banks’ revised self-regulation guidelines.12 The CCB, for its part, is a pre-emptive measure that allows authorities to temporarily raise capital requirements in the banking system as imbalances in the credit market develop. When activated, banks will be required to gradually build up an additional capital buffer of up to 2.5% of total domestic risk-weighted assets during the upswing in the credit cycle. The CCB requirement is a supplement to other capital requirements. Once risks have materialised, or if the intensity of risk is subsiding, the capital buffer generated from the CCB is released, either immediately or gradually. The key features of the CCB The CCB combines several key features that directly address the problem of cyclical risks to financial stability. In particular, when activated, the CCB should help reduce the amplitude and the consequences of imbalances for financial stability.
This internal consistency explains why monetary policy is the only part of the EMU framework that has clearly functioned as designed. Fiscal policies were supposed to conform to the other form of governance, where countries would decide on and execute their own budgets, but within the strict constraints of the deficit and debt limits set in the Treaty. Those limits were supposed to be policed by markets, the Commission and other Member States, but in practice the incentives of the latter to enforce the rules were weak. This meant that de facto rules could be applied with discretion, while Member States themselves decided on how to exercise that discretion – in other words, the worst combination of the two forms. The result was that fiscal positions diverged significantly, which then created substantial spillovers for other euro area members. But perhaps more fundamentally, internal inconsistency meant that fiscal policy itself became ineffective in several jurisdictions. A number of governments either did not have the fiscal space to absorb the shock they faced in the early stage of the crisis, or they were unable to maintain the trust of the market when investors finally reacted – and over-reacted. Fiscal policy therefore had to effectively give up its stabilisation function – which is vital with a single monetary policy – and switch to convincing investors of debt sustainability. Prudential policies were also supposed to fit the decentralised model, although here the framework was even looser.