We are in such a complementary environment today. At present we see no evidence that low interest rates are contributing to leverage-driven financial imbalances in the euro area. Indeed, the most serious financial stability risks tend to be associated with excessive developments in bank credit, and there are no signs of that in the euro area on average today. However, were we to enter a conflicting environment, the logic of the Tinbergen rule would become more apparent. On the one hand, if for example a bond bubble were emerging but inflation was still low, raising rates to combat that financial stability risk would run contrary to our price stability objective. On the other hand, if inflation were rising banks but banks in the euro area were still repairing their balance sheets, raising rates could have damaging consequences for the banking sector. Given the hierarchical nature of the ECB’s mandate, if we were to face such conflicts, where price stability and financial stability point in different directions for the path of interest rates, we would have to put price stability first. This is our legal obligation. And from an economic point of view, in circumstances where financial stability effectively becomes a distinct objective from price stability, the Tinbergen rule implies there have to be instruments other than interest rates to address it. Those instruments are of course macro-prudential policies.
However, less than 5% of the losses were insured, compared to 40% in developed countries2. Over the last five years, the region experienced a series of high-profile and very painful disasters such as the Tohoku Earthquake and Tsunami in Japan, floods in Thailand, and the Super Typhoon Haiyan in the Philippines. Losses from these three disasters are estimated to be close to USD 360 billion3, about the average GDP of the Philippines and Thailand in 2012. As these economies were underinsured, the bulk of the financial burden was ultimately borne by the governments. 4. The development of catastrophe risk management in Asia is still at a nascent stage, compared to more mature markets in the US and Europe. Yet Asia is expected to continue to experience a rise in natural catastrophe losses, as a result of climate change, and rapid population growth, urbanization as well as economic concentration in heavily exposed regions. So With this confluence of factors, the financial burden from natural catastrophes is expected to intensify. 1  “Source: EM-DAT – The International Disaster Database”. 2  “Risk Financing is Key to Building Resilience Against Disasters – Study”, ABD, 31 January 2013. 3  “Based on Swiss Re and Aon Benfield’s estimates”. BIS central bankers’ speeches  1  Minding the protection gap in natural catastrophe risk management 5. Going forward, governments can no longer act as the “insurer of last resort”.