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Prudential policy at times of stagnation: a view from the trenches

Piergiorgio Alessandri and Fabio Panetta ()
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Fabio Panetta: Banca d'Italia

No 300, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: In the euro area, macroprudential policy can be a powerful complement to monetary policy. However, its coordination with microprudential policy is a particularly delicate task. The coexistence of two supervisory regimes that rely on similar tools to pursue different objectives may at times give rise to conflicting decisions, or create uncertainty on the logic of the prudential framework. These risks are structurally greater in bank-based economies with highly concentrated banking sectors, and may be heightened in the contractionary phase of the cycle, when policymakers face a short-run trade-off between the resilience of the financial sector and the speed of economic recovery. This makes the micro/macro coordination problem a top priority for European supervisors today. In order to address it, supervisors must agree to rank their policy objectives and examine their interventions from a general equilibrium perspective. We remain agnostic as to how much capital European banks should ultimately be required to hold. Instead we stress that, irrespective of the target, supervisors should achieve it over the appropriate time span, minimizing any negative spillovers on credit supply and protecting the credibility of the newly-launched countercyclical macroprudential framework with all available means.

Keywords: banking supervision; coordination; policy uncertainty; euro area (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-cba
Date: 2015-12
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