Speaking at the ECB/EC joint conference in Frankfurt, Jaime Caruana highlighted that a new framework for global financial stability addressing the challenges of system-wide risks head-on is needed. Such a framework needs contributions from monetary, fiscal, and macro- and micro prudential policies.
The financial crisis has led some to suggest that the decades-long process of financial integration could and possibly should reverse. However, there is a tendency to underestimate the enormous benefits of financial integration, benefits which can be diffuse and hard to identify, but which are substantial nonetheless.
What is needed is a new framework for global financial stability, one that addresses the challenges of system-wide risks head-on. Such a framework needs to be global in the sense of being both worldwide and comprehensive, with contributions from monetary, fiscal, and macro- and microprudential policies.
Regulatory reform is under way, but this is just one of a number of building blocks. We also need adequate tools for systemic risk monitoring, and this means that we need better and more timely data. Uncertainty about the scale of losses on banks’ assets was the proximate cause of the crisis, but it was the dislocations in banks’ funding markets that turned the subprime crisis into a global financial crisis. Regardless of the methods used to manage systemic risks, a first step must thus be to monitor these funding pressures.
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