José Manuel González-Páramo: The European experience on macro-prudential regulation Speech by Mr José Manuel González-Páramo, Member of the Executive Board of the European Central Bank, at the I Jornada Financiera Banco Central de Bolivia, La Paz, 29 September 2010. *  *  *  I am grateful to Inês Cabral and Fabio Recine for their contributions to this speech. I. Introduction  It is a great pleasure for me to be today in La Paz to participate in this important event organised by Banco Central de Bolivia. In the course of my presentation I will try to illustrate our approach to the concept of macro-prudential regulation and oversight, a new policy area where central banks are expected to play an important role. My remarks are organised in three main parts. I will start by justifying the need to develop a macro-prudential policy framework. I will then move on to reflect on what we mean by macroprudential oversight. Finally, I will elaborate more in detail on the establishment of the ESRB as part of the reform of the EU supervisory framework, and briefly touch upon other reform initiatives in Europe. II. Why we need to develop a macro-prudential policy framework? The global financial crisis has unearthed fragilities in a range of policy areas which have prompted a careful review of main policy objectives and instruments. This applies to the field of micro-prudential regulation and supervision, which failed to ensure that financial institutions had sufficient capital and liquidity to cope with the financial shock.
Furthermore, given the fact that the framework for macro-prudential analysis and policy is presently only at a formative stage of development, the need for reflection on the risks of unintended consequences is key, as formulating policies that are aimed at safeguarding financial stability may create vulnerabilities further down the road. BIS Review 125/2010  3  IV. The establishment of the ESRB as part of the reform of the EU supervisory framework  One of the main lessons from the financial crisis concerns the necessity of a framework for monitoring the various sources of systemic risk and assessing their consequences for the financial system in a comprehensive and timely manner. Therefore, there is an agreement at international level about the need to strengthen the macro-prudential approach to regulation and supervision of the financial system as a whole. So far there has not been in Europe an authority able, both from an institutional and operational point of view, to conduct a comprehensive financial stability assessment covering the whole EU financial sector. Apart from the financial stability assessment conducted by individual central banks, the only area-wide comprehensive assessment is contained in the Financial Stability Review, which is prepared by the ECB and focuses on the euro-area. Moreover, Europe has lacked a framework that could allow translating warnings about possible building up of systemic risks in certain components of the financial sector into concrete policy actions by competent supervisory and regulatory authorities to address such risks.