06 September 2013

ECB/Mersch: Monetary policy and financial stability under one roof

In his speech, Mersch looked at the changes taking place under the roof of the ECB, specifically the ECB's taking over responsibility for elements of micro- and macro-prudential supervision in the euro area.

I would like to focus on a specific aspect of these interactions – that is, between monetary and macro-prudential policy. The key point I would like to make is that this interaction should be stronger than in the micro-prudential area, where the impending regulation imposes a separation between monetary policy and supervision. The reason for this is simple. While micro-prudential policy focuses on the stability of individual institutions, both monetary and macro-prudential policy take a more systemic perspective and aim ultimately at system-wide stability...

We can see why monetary and macro-prudential policies need to be properly aligned. In striving for price stability, the ECB needs to keep an eye on the possible effects of currently deployed or planned macro-prudential policies. Likewise, from a macro-prudential perspective, the current and expected future course of monetary policy needs to be taken into consideration.

For this reason, we would support different institutional arrangements for macro-prudential decision-making within the SSM than those that are foreseen for micro-prudential. In the latter case we have always argued for a clear separation of functions between the ECB as monetary policy-maker and supervisor. For macro-prudential decision-making, however, we see it as important that the Governing Council is more closely involved.

But beyond these considerations, one may ask, when the SSM is operational, what role should monetary policy play in financial stability directly? You will recall the discussion after the Lehman failure about whether central banks should do more to “lean against the wind”. With a close-to-optimal macro-prudential framework in place, should monetary policy leave financial stability out of sight?

In my view, the answer should be no. There are two reasons why it is important that the central bank remains alert to financial stability issues, even though its primary objective will remain to secure price stability.

First, the ECB’s policy analysis for price developments can contribute to financial stability surveillance... Second, in most of all cases the actions necessary to maintain price stability and those required to maintain financial stability are fully aligned. If, however a conflict arises between these two objectives, it is clear that ECB’s mandate leaves no discretion: The primary mandate is to secure price stability...

The general principles for guiding the interplay between monetary and macro-prudential policies, when both functions are partly under one roof at the ECB:

• Macro-prudential and monetary policy both have a systemic dimension, and macro-prudential instruments affect monetary policy objectives and vice versa. This suggests that decision-making for monetary and macro-prudential policy should be more closely integrated than for micro-prudential policy.
• There should be close interaction on the level of policy analysis to exploit synergies and maximum information regarding risks to price and financial stability.
• For monetary policy, even with suitable macro-prudential frameworks in place, there always remain circumstances that could warrant leaning-against-the-wind policies.

Full speech

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