Abstract
After more than 10 years of monetary stability, it is time for the European Central Bank (ECB) to develop its financial stability role as well. The recent financial crisis has highlighted the need for the ECB to take a role in maintaining financial stability. In this chapter, I first make the case that financial stability needs to be managed at the European level. Next, I indicate that the ECB has set a first step towards maintaining financial stability with the publication of a Financial Stability Review since 2004. In addition, during several bouts of financial instability over the last ten years, such as the financial turmoil in the aftermath of terrorist attack in 2001 and the current financial crisis, the ECB has proven to be an effective general lender of last resort (LOLR), providing adequate liquidity when needed.
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Notes
- 1.
Formal banking supervision rested with the Bundesaufsichtsamt für das Kreditwesen (which was subsequently merged into BaFin). The Bundesbank was always involved in providing the data necessary and monitoring the banks, and managed the emergency fund through which banks could obtain financing if they face acute liquidity problems.
- 2.
However, at the EU-wide level the ECB and the Bank of England (BoE) followed different policies and did not coordinate. Fearful of overreliance on central bank funds by banks (moral hazard), initially the BoE did not provide extra liquidity. Liquidity shortages in the UK interbank market caused severe funding problems for Northern Rock culminating in a bank run on retail deposits in September 2007. The BoE provided a massive lender of last resort loan to keep Northern Rock afloat and the UK government subsequently nationalised Northern Rock.
- 3.
Section 7.3 heavily draws on De Haan, Oosterloo, and Schoenmaker (2009).
- 4.
It should be noted that these figures have changed during this crisis. Nevertheless, cross-border banking is still an important element of the European banking system.
- 5.
The term ‘improvised co-operation’ has been coined to convey the view of an efficient, although adaptive exchange of information and decision taking. It relies on the idea that maintaining financial stability is a goal that every individual country is interested in achieving, so there are good grounds for co-operation (Freixas 2003). It can be argued that improvised co-operation corresponds to the current situation in the EU.
- 6.
This assumption is consistent with the post-BCCI Directive that stipulates that banks have to be headquartered in the country where most of their business is conducted.
- 7.
The Conservative Party wants to abolish the FSA and make the Bank of England responsible for prudential supervision. It also wants to establish some sort of conduct of business supervisor. The Conservatives would thus move to a twin peaks model, with a prudential and a conduct of business supervisor.
- 8.
Art. 32 of the Statute specifies that income from monetary operations (as well as any losses) will be shared among the participating NCBs according to their capital key in the share capital of the ECB. However, a decision to take up the individual LOLR role at the ECB would need political endorsement.
- 9.
Boot and Marinč (2009) argue that national authorities could be more willing to share information with the ECB, since only then support can be expected. But on the negative side, there is the bureaucracy effect (Kremers & Schoenmaker 2009). Bureaucratic agencies are notoriously bad in exchanging information. In the Northern Rock case, the second effect has dominated.
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Schoenmaker, D. (2010). The ECB, Financial Supervision, and Financial Stability Management. In: Haan, J., Berger, H. (eds) The European Central Bank at Ten. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-14237-6_7
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