Abstract
Financial stability is a shared objective of the ECB, national central banks, national authorities, and other institutions in the euro area. This chapter explains the activities that are pursued to safeguard the stability of the financial system. The first section defines systemic risk and explores how it can be measured. The second section discusses the policy process and instruments available with a focus on macroprudential measures, financial safety nets, and crisis management. The third section puts the policy area in an international context.
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- 1.
These definitions vary slightly across the euro area, yet the differences do not matter much in practice. As of early 2017, the ECB defined financial stability as “a state whereby the build-up of systemic risk is prevented. Systemic risk can best be described as the risk that the provision of necessary financial products and services by the financial system will be impaired to a point where economic growth and welfare may be materially affected.” (https://www.ecb.europa.eu/ecb/tasks/stability/html/index.en.html, accessed on 15 February 2017).
- 2.
These institutions mainly invest funds that are linked to specific payouts, such as insurance or pension payments.
- 3.
Ensuring the smooth functioning of payment systems is also done for reasons of monetary policy, given its importance for the monetary transmission mechanism and maintaining public trust in the currency.
- 4.
European stress testing exercises were conducted for insurance companies, occupational pension funds, and CCPs by EIPOA and ESMA , respectively.
- 5.
As of early 2017, the ECB defined the aim of macroprudential policy as (1) to “prevent the excessive build-up of risk, resulting from external factors and market failures, to smoothen the financial cycle (time dimension),” (2) to “make the financial sector more resilient and limit contagion effects (cross-section dimension),” and (3) to “encourage a system-wide perspective in financial regulation to create the right set of incentives for market participants (structural dimension)” (see https://www.ecb.europa.eu/ecb/tasks/stability/html/index.en.html, accessed on 15 February 2017).
- 6.
Not all euro area countries have established a legal basis to apply the systemic risk buffer.
- 7.
The idea of ELA goes back to the famous 1873 book “Lombard Street: A Description of the Money Market” by Walter Bagehot.
- 8.
Under capital controls, electronic transactions between bank accounts within the national system usually remain unrestricted.
- 9.
EC, ECB , EBA, EIOPA , ESMA , and Economic and Financial Committee (EFC). Iceland, Liechtenstein and Norway were observers in the ESRB at the time of writing (early 2017).
- 10.
- 11.
Article IV refers to the Articles of Agreement of the IMF , which all member states have committed to adhere to.
- 12.
This requirement applies to 10 countries of the euro area: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, and Spain.
References
Basel Committee on Banking Supervision (BCBS). (2011). Basel III: A global regulatory framework for more resilient banks and banking systems. http://www.bis.org/publ/bcbs189.pdf
European Central Bank (ECB). (2016, March). The ECB’s macroprudential policy framework. Macroprudential Bulletin Issue 1/2016. https://www.ecb.europa.eu/pub/pdf/other/ccbmp201603.en.pdf
European Central Bank (ECB). (2017). Macroprudential measures in the euro area as of 3 July 2017. Accessed August 15, 2017, from https://www.ecb.europa.eu/pub/fsr/html/measures.en.html
European Systemic Risk Board (ESRB). (2014). ESRB handbook on operationalising macro-prudential policy in the banking sector. https://www.esrb.europa.eu/pub/pdf/other/140303_esrb_handbook_mp.en.pdf
European Systemic Risk Board (ESRB). (2017). Other macroprudential measures. Accessed August 15, 2017, from https://www.esrb.europa.eu/national_policy/other/html/index.en.html
Padoa-Schioppa, T. (2010, September). Keynote address at the IMF conference “Macro-prudential regulatory policies: The new road to financial stability?” http://www.tommasopadoaschioppa.eu/wp-content/uploads/2010/10/speech_TOMMASO-PADOA-1.pdf
Further Reading
Blancher, N., et al. (2013). Systemic risk monitoring (“SysMo”) toolkit – A user guide. IMF Working Paper 13/168. http://www.imf.org/external/pubs/ft/wp/2013/wp13168.pdf
Constancio, V. (2016, April). Principles of macroprudential policy. Speech at the ECB-IMF Conference on Macroprudential Policy, Frankfurt am Main. https://www.ecb.europa.eu/press/key/date/2016/html/sp160426.en.html
European Systemic Risk Board (ESRB). (2014). Flagship report on macro-prudential policy in the banking sector. https://www.esrb.europa.eu/pub/pdf/other/140303_flagship_report.pdf
International Monetary Fund (IMF). (2013a). Key aspects of macroprudential policy. https://www.imf.org/external/np/pp/eng/2013/061013b.pdf
International Monetary Fund (IMF). (2013b). Key aspects of macroprudential policy – Background paper. http://www.imf.org/external/np/pp/eng/2013/061013c.pdf
International Monetary Fund (IMF). (2014). Staff guidance note on macroprudential policy. http://www.imf.org/external/np/pp/eng/2014/110614.pdf
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Fandl, M. (2018). Financial Stability. In: Monetary and Financial Policy in the Euro Area. Springer Texts in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-72643-4_5
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DOI: https://doi.org/10.1007/978-3-319-72643-4_5
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