Monetary and financial stability The global financial system has developed at an unprecedented pace in the last two or three decades. During this time, many countries have undergone significant processes of financial liberalisation that have contributed to deeper and wider markets, in terms of both the number of participants and the assets traded on them. In the international sphere, financial liberalisation has led to a growing number of countries gaining access to global capital markets and to a stepping up of the economic and financial links among different regions. Technological progress has also played an important role. The ability of market participants to obtain and process vast amounts of information almost instantaneously and to conduct complex transactions at low cost has grown enormously. In short, all these changes have significantly increased the possibilities for risk-sharing among economic agents. And, as such, there is ample consensus that this process of financial deepening brings tangible benefits for businesses, households and governments alike. There is little doubt either that this phenomenon will continue its course over the foreseeable future. In parallel to the changes on the financial landscape, we have also witnessed a remarkable performance by our monetary policy frameworks in terms of attaining and maintaining low and stable inflation, with noticeable effects on economic welfare. I believe that those achievements are largely permanent. I further consider that, as stressed by Alan Blinder in the introduction to his insightful paper, the debate over some of the core principles for sound monetary policy practice seems to be resolved for now.
Here I would like to make also four points. 2.1 Stress testing is an important tool in our supervisory toolkit in Europe In Europe, the EU-wide stress test is mainly a micro prudential exercise whose main objective is the identification of risks for both supervisors and banks. For European supervisors, it has become a concrete support to the Supervisory Review and Evaluation Process (also known as SREP in Europe) and to the assessment of capital planning. For banks, it should complement and challenge their internal capital adequacy assessment process (ICAAP). In a more heterogeneous market than in the US and given the micro prudential nature of the exercise, the EU stress test framework has been instrumental to establishing a level playing field across banks with a constrained methodology while at the same time taking into account the specificities of some business models with a bottom-up approach allowing supervisory dialogue. 2.2 EU-wide stress tests have helped improving market confidence in the EU banking sector’s resilience EU-wide stress tests have gradually and consistently improved market confidence in the EU banking sector’s resilience. This year, an EU-wide stress test was conducted on large European banks. Starting from an already deteriorated macroeconomic environment at the end of year 2020, the exercise confronted banks with a very severe adverse scenario, which envisioned a protracted GDP contraction in a low interest rates environment.