Furthermore, our two-pillar strategy allows us to identify long-term risks to price stability and to financial stability at an early stage through our monetary analysis. In addition to our economic analysis, our monetary analysis examines not only the evolution of monetary aggregates, but also, in close detail, the dynamics of their components and of their counterparts, including the evolution of credit outstanding to categories of borrowers. This also brings potential risks to the stability of the euro area financial system to our attention. Question: But is that enough? BIS Review 1/2009  1  Answer: All central banks make a contribution to financial stability in their respective economic areas. And I would say that in our case macro-prudential matters are certainly part of our responsibility. Question: Is the same also true of banking supervision? Answer: The position of the ECB’s Governing Council has always been that a very close link between central banks and banking supervisory authorities is indispensable. One of the lessons of the first ten years of the euro, and of the recent financial market turbulence, is that if we can make an even greater contribution to the smooth functioning of banking supervision in general and in the euro area in particular – with regard to banking institutions with crossborder activities – this could be a sensible option. It has to be studied very carefully, and we will see afterwards what the position of the Governing Council will be. Question: The spreads on government bonds have widened considerably in the euro area.
The Objective of the FPC The UK government has proposed that the FPC’s main responsibility should be taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system (my emphasis). “Systemic risk” is defined to embrace both faultlines in the structure of the financial system, ie the way its components are joined up; and cyclical threats from unsustainable levels of leverage, debt or credit growth. Two glosses on that are warranted. First, the government’s plan does not entail the FPC being held accountable for fine tuning the credit cycle, but rather for ensuring stability by maintaining the resilience of the financial system. An example might help. Say that in the face of a credit boom, the FPC raised banks’ capital requirements. That might help to slow the boom, and it would be helpful if it did so. But even if the boom continued, by virtue of having higher capital ratios the banking system should be more resilient when the bubble burst. If those FPC actions prevented the banks going bust, the downswing in the credit cycle, and so in the business cycle, would be less severe because the flow of credit services could be sustained. That would be a success. Perhaps not always a glorious success, but a whole lot better than where we are right now.