 Okay, so welcome back to the session I'm, Erlen Nier. I work in the Monitoring Capital Markets Department at the IMF. I'm going to introduce the policy panel that we have here as part of the session, entitled Macredential Policy Taking Stock and Approaching New Frontiers. Just had an announcement on some changes to the lineup. Amir Yaron was announced but is unable to join the panel, the central bank of Israel Governor. Also, Tobias, the agent was meant to chair the panel, but he had to fly back to Washington. And so he is instead going to be online. And we thought it'd be most practical perhaps for me to try and moderate the panel from here in Frankfurt with Tobias joining as one of the four panelists. So with that, let me introduce the panelists real quick. So we have Klaas Nott, who is the president of the Niederlandsche Bank and chair of the Financial Stability Board. He's had a distinguished career in the Netherlands as well as internationally, I think including even a student at the IMF as an economist in the European department way back. We have Nelly Leang online who is now the undersecretary of the United States Treasury for domestic finance and has previously had a long and distinguished career at the Federal Reserve Board. Welcome Nelly. We have Vas Maduroz who is serving as the deputy governor of the central bank of Ireland and prior to that has had again a distinguished career at the Bank of England. And then our fourth panelist of course then is Tobias, who everyone knows as the financial counselor and director of the Monetary and Capital Markets Department at the Fund. There's two themes to the policy panel that we have communicated with the panelists in advance. One is what have been the main challenges to the effective use of market potential policies so far and what is the international experience. And the second theme for the panel is sort of looking forward. How should policy makers approach some of the new frontiers of market potential policy, including potentially the approaches to take for risks in the non-bank financial systems, approaches to take to regulating crypto and perhaps trying to control some systemic risks also that might arise from climate. So in terms of the proceedings we're going to have an initial round and after that initial round we'll have a couple more rounds of looking back and looking forward and also a Q&A at the end. For the initial round the order that we've agreed was class note was going to go first and I think class you have some slides. Nelly Leung is going to be second and then Vassma Duras and Tobias Adrian last. So class note, the floor is yours. So thank you Erland. Many thanks for your kind introduction and also to you and Tobias for putting this panel together. I don't have slides, I have words and I have some words, but definitely not enough words to ever deal with such a complex and fascinating topics but what I will try to do is to focus on just a few high level issues regarding the effective use and the challenges that we face in implementing macroprudential policy. But first of all, we should not forget that this is still a relatively new discipline. It only originated after the global financial crisis and at that point in time we first needed to design the tools to fix the fault lines in the financial system that became available then and then gradually over time of course the efforts shifted from design to implementation and I think this is already an illustration of the fact that these challenges that we talk about today are rapidly evolving. So now I think today the focus is very much on also using the tools and evaluating their effectiveness and their efficiency but of course as we do that new risks also present themselves to which we have to adapt our macroprudential policy. So what I intend to do in this opening remarks is first discuss some of these challenges that relate to implementing the existing macroprudential tools and there I will obviously draw mainly on the experiences of let's say the Netherlands as a member state within the Euro system and then I'll move on to the new frontiers of macroprudential policy development which are arguably global in nature and where the FSB jointly with the IMF has a leading role to play. Now first on the challenges of using macroprudential tools let me begin with the observation that there is still a lot of room for improvement and that I also understood from the presentation that I just listened to if you for instance take a look at the way Euroarea jurisdictions apply macroprudential tools in practice there is still a lot of difference and differences that cannot always be objectively explained. Look for instance at the harmonized framework that we have for identifying domestically, systemically important banks for the identification the framework is indeed harmonized but then there is no further guidance on how to calibrate actually the buffers that go with it and as a result you can have two banks with similar scores on the indicators for systemic importance such as size to GDP, interconnectedness, flexibility but then they can end up facing quite different requirements if you look at most of the big banks in Europe that fall within a range of let's say 1 to 2.5% of risk-rated assets when it comes to buffer allocation but some of these allocations bear no apparent relationship to the scores that were assigned and I think it is important that we further investigate such heterogeneity but that we also actively think about sort of what mechanisms could be put in place to correct for this in order to ensure a true level playing field when it comes to evaluating the effectiveness and the efficiency of macroprudential tools I believe that our main challenge is that we have to make sure that the regulatory framework remains fit for purpose that it remains sufficiently capable to address systemic risk so it is about adaptability the financial sector is ever-changing and I think that's why we have to keep an open mind with respect to developing our framework Now, against that background allow me to highlight some lessons that I think are relevant from the last couple of years First, I think it's equally important that we understand what macroprudential policy can do and also what it cannot do If you have a look at the macroprudential toolkit I think what I'm talking about is in the Netherlands but I think it is quite sort of relevant in other countries as well that toolkit is mainly geared toward building bank buffers and building resilience Ideally, of course in an ideal world, the macroprudential authority should also have sufficient tools at its disposal to limit the cyclical build-up of excessive risk at a much earlier stage and here of course I'm thinking about measures like borrower-based instruments but these borrower-based instruments often interact with political economy deliberations and that's why they are usually not assigned to macroprudential authorities So that's also a reason why I will not dwell too much further on it here let's dwell on the things that we can actually actively influence Second, I do think that the Covid pandemic has demonstrated to us the great values of having sufficient capital buffers that can not only be build-up but that can also be released This releasable capital should supplement sufficiently large layer of the structural buffers but that releasable part should then be usable in the face of adverse shocks It should thereby give banks additional room to absorb losses but keep the credit flowing Now, this is also very much the spirit within which we took a couple of decisions in the Netherlands where we recently revised our framework to target a 2% counter cyclical capital buffer in what we call an environment in which risks are neither subdued nor elevated in all the jurisdictions that is being referred to as a sort of positive neutral rate but that is something in the Netherlands we introduced and that brings me to my third lesson and that is of course that it is important to bring buffers early on So building capital in times when the risks are slowly on the rise when financial conditions are still favorable, when bank profitability is still there that is absolutely necessary in order to be able to prepare the sector for adverse times and also to avoid difficult situations later on such as the one in which regulators may want to increase capital requirements but then fear the proscyclical effects that this could bring about In the same vein there is also merit in taking better into account both the benefits and the cost of capital requirements when determining the right policy mix The financial industry will tell you all about the costs of bringing on capital requirements I think it moves us to also be very clear and much more outspoken about the benefits and I believe that this is still relevant also in the current juncture where the profits in the European banking sector are still looking rather healthy while the uncertainty about the future macro financial environment is now clearly on the rise and maybe an interesting subject for discussion also for the panel is whether 2022 was not a little bit of a missed opportunity in this regard Good, despite this it is clear that we have come a long way but I also believe that macro-prudential policy will have to continue to evolve it will have to continue to involve making difficult decisions decisions based also on expert judgment in quite an uncertain environment decisions that will not always be popular but that's why I believe it's very important that we communicate also actively on these measures not only with the sector but clearly also with the public at large in order to make the policy more acceptable and hence more effective If I sort of look forward on this specific topic I think the recent banking turmoil in March drives home also the question of whether our policy tools are sufficient to for instance counter the macro-prudential risk of a systemic liquidity crisis and then also specifically for Europe I believe we have to ask ourselves whether having a true banking union warrants further consistency in national practices for example with the use in the application of the counter-cyclical buffer and also a reflection on whether a counter-cyclical macro-prudential tool at the European level would also be warranted over and above those at the national level So let me now turn to the new frontiers the second part of the question of the panel the new frontiers of macro-prudential policy including of course areas like non-bank financial intermediation crypto assets and climate all these areas I think affect financial stability so all these areas in principle require action starting with MVFIs and in particular with investment funds they have shown their potential to generate systemic risk in the past as early as long-term capital management in 1998 but also more recently the March 2020 Dash for Cash the Archegos Collapse and the UK Guild Market episode on crypto assets it's clear that these activities cannot yet be considered systemically relevant but it is also true that traditional financial institutions have been expanding their participation in such markets and that is of course worrisome from a global financial stability perspective considering crypto's inherent volatility and their global reach on climate change just this summer we have witnessed a range of extreme weather events across Europe from wildfires to torrential rains and floods presenting a stark reminder of the systemic dimension of climate change and in addition to such extreme events a disorderly transition to a low carbon economy could also have some destabilizing effect so macro-prudential policy can play a role in addressing all of these risks but it is also true that in developing new of course there are even more challenges than when it comes to implementing something that we sort of have known already a little bit longer and what makes it even more complicated is that both the MVFI and the crypto asset sectors are of course characterised by a great variety of entities, of activities and of business models there is simply less homogeneity in that sector and a one size fits all approach to enhancing its structural and cyclical resilience is therefore unlikely to be successful in both cases it is difficult to properly gauge systemic risk also because there are lots of data gaps still out there and there is simply a lack of harmonised analytical tools when it comes to climate change that uncertainty is even larger as it is simply difficult to know how and when climate related risks will materialise now given the inherently cross-border nature of activity and risks in all these areas global coordination and consistency are of course of the utmost importance to avoid that otherwise the risks would simply shift elsewhere so how should we approach these new frontiers now let me highlight some considerations for macro-prudential policy in MVFI as this is probably out of the three areas the area where the discussions at this moment are the most advanced at this stage as in the banking sector macro-prudential policy for MVFI should seek to prevent the build-up of risks make the financial sector itself more resilient and limit contagion by focusing on the system as a whole but although the objective is similar the approach may be quite different and that is due to the nature of systemic risk in MVFI if we take for instance the example of investment funds if you look at the economic functions of MVFI then investment funds are really the bulk of where the action is whereas systemic risk in the banking sector often revolves around the solvency of individual entities systemic risk in the investment funds sector generally revolves around liquidity imbalances arising as a result of collective actions of cohorts of funds generating these sharp spikes in liquidity demand but therefore the practice of applying higher requirements to systemically important institutions such as higher capital buffers is unlikely to be the central feature of a macro-prudential policy with respect to MVFI a macro-prudential approach to investment funds should therefore be primarily activity based rather than entity based and include requirements that would apply to all entities within a specific cohort regardless of their individual systemic relevance and in this way macro-prudential policy would presumably raise the baseline of existing micro-prudential requirements at the fund level by embedding the macro-prudential perspective it would allow funds to internalize their potential impact on the wider financial system so looking ahead I see three important components in the evolution of macro-prudential policy for MVFI first we should finish important parts of the ongoing work to address structural vulnerabilities you simply cannot run before you walk right following the March 2020 market turmoil analytical and policy work at the FSB level has focused on enhancing money market fund resilience on liquidity mismatch in open-ended funds on the excessive use of leverage and on the lack of liquidity preparedness in the context of margin calls and work is still ongoing in many of these areas and importantly this does include assessing whether existing tools can be repurposed repurposed by embedding the macro-prudential perspective which would then likely lead to simply raising the baseline of existing requirements second we should focus on enhancing capabilities in the area of data availability, governance and analytical tools to adequately gauge systemic risk in addition to a solid micro-prudential foundation this is the key to any macro-prudential approach it is hard to frontload macro-prudential policy in the fog and third we should assess the need for additional macro-prudential tools including the hands those in the hands of authorities rather in the hands of the firms themselves to address the remaining risks that are not mitigated by embedding the macro-prudential perspective in existing regulation now finally a few words on the other two areas the approach for crypto assets I believe it's going to be fairly similar in that the focus should first be on building micro-prudential regulation and then make sure that it's globally consistent to avoid arbitrage then we need to understand again the data gaps and improve what our understanding of what actually constitutes systemic risks in this sector including the spillover and the potential spilloves to banks and the more traditional asset glasses and in the case of climate finally I believe that the existing banking macro-prudential toolkit already provides a starting point but it simply needs better fine-tuning to capture climate-related risks and to prevent them from building up to build resilience in case these risks materialize and so on so the mechanism in all of these sectors is roughly the same but I do think the level of advance-ness of the stage we're in is quite different where we clearly have further advance-advanced in the banks than in the non-banks so then in the climate space so let me stop here and look forward to an interesting exchange of views with the other panelists and with you in the audience thank you so Nelly please the floor is yours okay thank you and thank you Erlen thank you to the organizers for inviting me to participate in this panel today I'm sorry I can't be there in person but I have been enjoying the conversation so far very much I'm going to talk about some recent developments in macro-predential policymaking in the United States and through some examples that are designed to highlight some of the challenges as other speakers have already said macro-predential policymaking is still relatively new in advanced economies having become more mainstream only after the global financial crisis the core idea as you know is underpinning these policies is that regulators need to take a holistic approach to safeguard the broader financial system that means regulators need to consider not only what is appropriate for individual financial institutions or markets they also need to think about how the different parts are exposed to one another and how they interact to provide credit and other vital services to support economic activity most countries have established new financial stability committees David Eggman mentioned that this morning and I've done research on this in the past and these are designed to help ensure that financial authorities consistently consider financial stability risks this work requires that regulators more formally communicate and coordinate on a regular basis to use existing tools and adopt new tools to address vulnerabilities identified all this is to say that macro-predential policymaking can be quite complicated so I want to walk through three examples today of how macro-predential policy in the US are being developed and to illustrate that they need to be very flexible and adaptive I'm defining macro-predential policy broadly to include both cyclical and structural policies the first example concerns how to identify and address vulnerabilities in the non-bank financial sector the second example concerns counter-cyclical features of bank capital in the United States the third is about bank liquidity risk management in light of the accelerated runs on uninsured deposits that we saw earlier this year so starting with non-bank financial intermediaries as others have noted this is just a big growing part of providing credit to the economy it's more than doubled relative to banks in the US and banks as you know also are a large provider of funding for this sector in the US these entities have traditionally been regulated to protect investors and consumers and in some cases for safety and soundness like insurance companies in 2010 the financial stability oversight council was created and it is charged in the US with identifying and responding to potential risks to financial stability including those that come from non-bank intermediaries and activities since its inception the FSOC has worked with financial regulators to evaluate where systemic risks could be significant and work to how to reduce those vulnerabilities using that arise from financials activities and products in addition the Dodd-Frank Act empowered the FSOC to designate a non-bank financial institution as a systemically important financial institution or a CIPI if it determines that material distress at the company or the and this is definite statute nature, scope, size scale, concentration interconnectedness or mix of the activities of the company could pose a threat to US financial stability once designated a non-bank CIPI would be subject to supervision and regulation by the federal reserve system including potentially capital and liquidity requirements resolution planning and other enhanced prudential standards the FSOC designated an insurance company and a finance company that had required federal support during the global financial crisis and then designated two insurance companies all in 2014 one of the insurance companies contested its designation and a federal court struck down the designation in 2016 and then the FSOC voted to rescind the remaining three designations in 2018 in 2019 during the previous administration FSOC adopted new guidance that would make it significantly harder to designate institutions among other changes the new guidance prioritized activities based approach over designation and under this approach the FSOC would examine financial products activities or practices and would work with existing financial regulators to address any risks they might pose to financial stability the FSOC would consider designating individual institutions only as a last resort after having exhausted other options earlier this year in the current administration FSOC proposed revised guidance on these determinations and it would no longer require the council to use an activity based approach this proposal is consistent with the intent of the Dodd-Frank statute which does not require the council to first use an activities based approach before considering other options it does not prioritize designation over activities based approach but instead reflects that the FSOC should be able to use any of its tools if needed so that it can respond appropriately to potential threats to financial stability I'm just citing a quote from Secretary Yellen who is the chair of the FSOC when introducing this proposal she said the council does not broadly prioritize one type of tool over another rather we plainly examine a risk and we design our response to address the risk we are seeking to mitigate at the same time to provide greater transparency about how we identify and consider policies to reduce risk to financial stability we also issued for public comment and analytic framework and under the framework which is familiar to many of you which is about identifying vulnerabilities the council would monitor a broad range of markets, asset classes and types of entities working closely with regulators to evaluate the vulnerabilities such as excessive leverage or liquidity mismatch having identified a significant vulnerability the council could then work with the appropriate regulators to reduce vulnerabilities could issue recommendations informally to the primary regulators or make use of one of its designation authorities so in some cases, vulnerabilities arise from activities undertaken by a broad range of firms of different sizes and are most appropriately addressed through activities based regulations liquidity mismatch in open end bond or loan mutual funds are good examples investors in bond loan open end mutual funds can redeem funds shares daily but the underlying bonds and loans rarely can be sold that quickly without incurring significant transaction costs which then would be borne by the remaining investors in the fund so this mismatch leads to a first mover advantage and gives investors incentives to run which can have systemic consequences which we saw in March 2020 another example some money market funds that are generally expected to pay a fixed net asset value also based runs if they hold information sensitive assets that is they have some assets with quality that can come into question in stress periods so the FSOC as well as the FSB has called attention to this issue repeatedly in annual reports and letters in numerous places and in the US the FSOC issued a comply or explain directive to the SEC the securities regulator and a member of the FSOC to address the run risks in money market mutual funds and the SEC issued new regulations more recently though it became evident in March 2020 that the run incentives at the prime and tax exempt money market funds had not been fully addressed by the previous reforms and the SEC adopted new rules and the SEC is now in the process of reviewing comments on a proposed rule aimed at reducing run incentives in open end funds but in other cases individual institutions may be so large complex and interconnected that they require the kind of comprehensive supervision and regulation that designation would require currently while no institutions are designated by the FSOC as non-bank SIFIs FSOC under a separate authority has designated eight financial market utilities mainly CCPs as systemically important and then these firms are subject to heightened potential supervision standards by their primary regulator and with the Federal Reserve as a secondary regulator so combined this is this example the analytic framework and the revised non-bank guidance should enhance the council's ability to identify and address potential systemic risks from non-bank financial intermediation let me turn to a second example and this will be more brief and that is macroprudential tools for systemically important banks as you all know with Basel III following the global financial crisis there are capital surcharges for globally systemic important banks and the CCYB was introduced to lean against the credit cycle in the US GSIBs are subject to the capital surcharge and it varies by the bank characteristics US regulators have also adopted a counter cyclical capital buffer framework but have held this buffer at zero since its inception given that the US CCYB has not changed over the business cycle you might conclude that US regulators have revealed a preference for structural rather than cyclical macroprudential tools I would say while there is some truth to this claim this conclusion might be too strong because it does neglect the cyclical aspects of the domestic stress test framework which includes a capital analysis reviewed the CCAR and the Dodd-Frank stress test and that is a key way part of the way for GSIBs and other banks that are regulated in the US so as you know bank stress tests can serve both microprudential and macroprudential objectives they assess the adequacy of bank capital under certain scenarios but they can also lean against the business cycle in two different ways and I wrote a paper on this with John Cone in 2019 first there's a way to design the scenarios so that the macro economic path is counter cyclical so depending on your starting position this shock is more severe if you're in a good time and less severe when you're in a bad time it's simply said the second way and actually the more binding way had been occurring is the stress test required that banks pre-fund their shareholder distributions that is they required banks to hold back the capital for planned dividends and share buybacks that they lined to make over the stress period horizon this could be as much as two percentage points of capital a year when earnings are high the future naturally raises the amount of capital required in the stress test if you start from a strong position this is to say that US banks have been subject to some counter cyclical capital regulation in the US even though the CCYB has not been activated I would note though however that bank regulators did change the stress testing program in 2020 in a number of ways to raise the minimum but they did reduce the required pre-funding of shareholder distributions and this in this way it did reduce the counter cyclicality but there's still some remaining okay my third example just want to touch briefly on the implications of the banking turmoil last March this March 2023 for macro proof policy the failure of two banks over a single weekend revealed a number of weaknesses first of course it was the firm's own risk management and governance practices as well as weaknesses in supervision but a key vulnerability exposed was related to uninsured deposits and the rapid speed at which depositors could run much faster than in the past if depositors were to lose confidence in a bank so Silicon Valley bank had significant unrealized mark to market losses on government securities and what appeared to be relatively high quality mortgages but was not able to raise new equity as it wrote down those values it lost more than a billion dollars in deposits which is a quarter of its deposits in one day could have lost another hundred billion headed opened the next day almost 90% of its deposits were uninsured and they were highly concentrated signature bank the other bank had a similarly high share of uninsured deposits roughly 90% though it was half the size of SBB so during this episode in my interpretation the high share of uninsured deposits rather than the size of the banks was most critical to creating contagion and authorities were concerned that runs at even small banks much smaller banks could spread more broadly in this situation and so to reduce the risk of deposit runs from other banks that had similar business models the Federal Reserve the FDIC and Treasury invoked what is called a systemic risk exception to stem the system wide runs on uninsured depositors by protecting the uninsured depositors at the two failed banks and at the same time the Federal Reserve established a program so that banks sound banks could liquefy their Treasury and agency securities and these decisions were made not because the troubled banks were too big to fail but to prevent broader contagion from uninsured deposits so these events in my view suggest regulators need to be looking at the existing macro-approved toolkit whether it's sufficient for the management of systemic liquidity which Klaus referred to earlier are there new liquidity management tools that could be put in place to prepare for runs that are extremely rapid on uninsured deposits are there operational changes that could be made at a central bank to increase the timeliness of the provision of central bank liquidity and these questions I believe are not just for the US but also for banking sectors globally and this is on the FSB SCAB agenda FSB more broadly and the other standard setters so I opened these my remarks this morning by just saying that macro-predential regulators need to be flexible, adaptive, creative in responding to different situations there's a number of tools I tried to illustrate a few on how they can be applied this diversity of tools just a caveat the diversity of tools and the applications raised some important challenges like studying the effectiveness of macro-predentials and promoting greater and more intentional use I think research on this is critically important we do need to study are they having their effect how they can be used the diversity makes it harder but I really hope the researchers in this room will continue to pursue this important area of study with that I will stop there, thank you so much for your attention thank you very much Nelly what Maduro's is next up thanks very much Ireland and thank you so much for colleagues from the ECB and the EMF for organizing this event really delighted to be here today and I've looked at the full program it looks great including some of the papers that we're going to be discussing so I was thinking of I mean in Ireland both developing the macro-potential framework and then also implemented but also more recently reviewing elements of it as we've gained more experience from ourselves and also other jurisdictions so I thought I might start by looking back a little bit and then focus on some of the more forward looking dimensions and of course I will be focusing very much on the Irish experience so starting with a backward looking perspective I think at a high level for me it would be relatively a little bit more positive than I think David was in the previous session because if we take a step back I think there has been meaningful progress in both building the frameworks and then the implementation of them it has been only 15 years since the height of the global financial crisis which of course laid bare the kind of fault lines in the overall macro-stabilization framework because you had central banks focusing on price stability on one hand you had supervision regulation focusing on the safety and soundness of individual institutions and then you had this gap in the middle on the interaction between the macro-economy and finance and that's where macro-potential policy filled that gap but 15 years ago it was far from clear that we would end up where we are now and remember some of the early discussions about developing a macro-potential perspective in regulation and at the time it seemed quite distant and also quite conceptual and even some of the early puzzle committee discussions about macro-potential tools like the capital buffer or buffer for systemically important institutions it wasn't certain whether there would be a greed or then implemented so if you look at where we are now at the global level we have legislative frameworks in place that give authorities specific macro-potential powers we have institutional frameworks in place in Europe with a European systemic risk board and of course the national macro-potential authorities of which the central bank of Ireland has won we've seen increased use of tools whether it is capital based tools or borrow based measures but of course there are differences across experiences and we've seen more analysis on understanding the effects of these policies now turning a little bit to our own experience in Ireland as I've mentioned we have been active in both developing the framework and implementing it now to some extent this reflects what was a very painful experience in Ireland during the financial crisis which demonstrated the costs of financial instability on society which were large and very persistent and another way of putting it demonstrated the costs of not taking action in the period before to safeguard resilience but there is a broader dimension as well Ireland is a small open highly globalised economy and it's also within a monetary union so when you think of macro-potential policy for us it's one of the key macro-stabilisation levers when we think about guarding against risk stemming from macro-financial imbalances and our approach has evolved over time of course we've learned lessons we've learned lessons from our own experience lessons from other experience and where we are now is we think of our macro-potential framework as consisting of three broad pillars measures related to banks measures related to borrowers and measures related to non-banks so in banks of course it's mainly around bank capital and we've introduced the counter-critical capital buffer and similar to our colleagues in the Netherlands we've set a one and a half percent CCYB rate for when risks are either elevated nor subdued and we've also used buffers for systemically important institutions to deal with the distribution of risk around the banking system on borrowers we've introduced measures to limit the share of new lending at high levels of indebtedness high loan to income multiples and high loan to value ratios and in non-banks and I'll come back to this this is an area that is one we're increasingly focused on we've introduced some measures but this is an area we're heavily invested on with colleagues internationally and I think I would say at least in Ireland these have made a material difference to macro financial outcomes and I think take the mortgage measures as probably the most important example they have been key in ensuring sustainable lending standards in the mortgage market in Ireland so just to give you one example in the five years to 2007 around half of new mortgage lending was done at loan to income multiples greater than four if you look at the same share in the five years to now it's around six percent so the the kind of tail of high indebtedness and the kind of lending standards are a lot more sustainable than they were in the run-up to the financial crisis and this does mean that the household sector now with inflation high the cost of living putting pressures on household budgets and of course interest rates rising to ensure that inflation goes back to target the household sector now is in a more resilient position to absorb these interest increases then it would have been in the absence of these measures and a lot of our analysis which of course is very challenging is what might have happened in the absence of these measures and counterfactuals so looking back I would say has been a lot achieved but of course as a number of others have mentioned back potential policy is a young discipline so there is further to go so let me turn to the two forward-looking dimensions now and I'll focus on deepening our analytical frameworks so really delight that we're having this conference because it's a key element of it and the second one that others have also mentioned is ensuring that the back potential framework evolves in line with the evolution of the financial system so on analytical frameworks because it is a younger discipline and it is I think particularly critical that we continue to invest in the analytical underpinnings of macro potential policy and it is hard compared to other macro policy frameworks like monetary policy or fiscal policy because macro potential policy deals with tail risks and tries to measure tail risk I mean it's hard enough to focus the central case we have to do this for the evolution of tail risks there's no clear observable measure of our ultimate target and going back to what I was just saying now the benefits of macro potential policy are difficult to measure they're really unobserved certainly in good times but the cost can be more visible so it is difficult but it's no less critical so let me align three areas of focus at least from a policy perspective I think it's important that we collectively continue to make progress on the first one is around risk assessment and analytical tools that help inform what I think have to be forward-looking judgments around the evolution of the risk environment and then also the resilience of the financial system to these tail risks and the reason why I think it's critical is because it has to be forward-looking if you want policy to be effective because there are lags and it needs to also be done in a kind of systematic manner the second area is around analytical frameworks and models to help inform policy judgments around the benefits and the cost of different macro potential interventions because like all policy interventions macro potential policy entails both benefits and costs for the economies a whole and macro potential third of course do not aim for resilience at any cost that wouldn't serve society well and again there's areas that we've made more progress on in bank capital tools we've made more progress on collectively but in the area of borrower based measures I mean we did some work to try and progress this as part of our recent framework review but it's an area where I think a lot more can be done and then finally the third one is around the broad area of macro potential strategy so Nelly was saying that there are so many different tools how do the tools interact between them how does macro potential policy interact with other policy frameworks like monetary policy what are when we think about structural characteristics of economies or financial sectors how should these affect our macro potential stance so to get towards maturity of macro potential frameworks research and deepening these analytical underpinnings will be critical I'm delighted that we're having conferences like this to share our collective learnings and there's also responsibility on us to share our data and information and our experience and also being clear about what our policy agenda questions are so then let me turn to the second for looking priority which is around the evolution of the financial sector and the structure of the financial system is dynamic it's not static and for any type of regulation to be effective including macro potential regulation it also needs to be dynamic if regulation is static it won't be effective now key dimension that respect and the one I'll focus on is around the growth of non-bank financial intermediation that both class and Nelly mentioned already and you all know that since the global financial crisis there's been this growth in market based finance including driven by investment funds and you see this in so many different dimensions now you see this in terms of the share of financing of companies the share of financing of commercial real estate markets the share of financing of cross-border capital flows to emerging markets you see this becoming increasingly relevant for different dimensions of the global economy and there are real benefits of more diversified financial system but for those benefits to be realized of course you need this form financial intermediation to be resilient to shocks and we've seen episodes as class and Nelly mentioned recently where this hasn't been the case and vulnerabilities in the non-bank sector the investment fund sector contributed to amplifying some of the stresses that we saw there in broader markets dash for cash the UK market guild market disruption last year in the role of LDI funds and this is why the kind of regulatory framework for the sector needs to evolve because so far the framework has largely not entirely but largely developed with an investor protection perspective in mind which of course is and remains a critical perspective but the sector now matters for the rest of the financial system and the rest of the economy and this is the kind of macro potential perspective and the evolution that the thing is important that we see in the global regulatory framework this has been and will continue to be a key priority for us at the central bank we have a large internationally focused investment fund sector in Ireland we have taken steps already so we have introduced micro potential measures to safeguard the resilience of property funds property funds in Ireland now count for around 30 to 35% of the stock of commercial real estate so if this source of financial intermediation were not resilient it could affect the functioning of the market on the back of the LDI episode last year we working with colleagues across Europe introduced supervisory interventions around expectations for resilient standards for LDI funds we have been and will continue working with our colleagues internationally at the FSB and the MSCO on the broad agenda about strengthening resilience of NBFIs including OEFs and NBFI leverage and in that context we also recently published a discussion paper that seeks to set out how can we collectively develop an overarching framework that has this macro potential perspective in the regulation of the investment fund sector and that seeks to consider what might of such a framework be or some of the principles that might underpin its design or some of the potential tools that could be used existing or repurposing to achieve those objectives and also operational dimensions of it including of course data issues which are critical in data sharing which is also important dimension of that. It will be a multi-year agenda and it will require significant global and European cooperation but it's also a critical agenda because going back to where I started the financial system is evolving and will be important that the regulatory approach evolves with it. So I'll finish off here. I'm sure we'll cover much more of this during the discussion but in summary significant progress to date but there is still relatively young discipline and plenty for us to focus on collectively towards maturing the framework. Thanks so much. Thanks so much Vas It's time for you to come in. Can you hear me now? Yes, okay, perfect. So let me apologize for not being there in person. I have been looking forward to attending this workshop in person but my father in law passed away unexpectedly so I have to I had to come back to Washington for the funeral and let me thank so much the two speakers who could make it in person class in Vasilius. So I don't have prepared remarks but I do have a slide so I'm going to try to share this now. I hope that you can see my slides. Is that can you see the slides? Yes, okay, I see it. Okay, perfect. I thought I'd take a little bit more of a broader country perspective and also speak to emerging markets and small open economies which is some of the complementary to the previous speakers. So the current conjuncture is one where macro-religerables have been strengthened as we have heard from all three speakers but of course we are in a pretty unusual macro environment where interest rates have risen dramatically and that's even more dramatic in emerging markets than in the euro area or the US so the chart on the left shows you the rate path and you can see in Latin America for example on average interest rates have risen by over 10 percentage points, right? So in the US it's about 5% euro area about 4% but in emerging markets Latin America but also in Eastern Europe interest rates have gone up much more dramatically and I would argue that it's quite oppressive how much financial stability we have seen in this environment of course with the exception of the US turmoil that I mentioned and I would also say the NBFI turmoil last October in the UK so of course you know prudential standards are much much tighter so this chart shows you for example for emerging markets you know the capital levels and you know they have gone up quite dramatically in advanced economies they have gone up proportionally even more than in the emerging markets and liquidity requirements have also been strengthened governance has been strengthened and of course stress testing has now deployed all over the world in advanced economies and in emerging markets and stress testing is primarily solvency stress testing but is also oftentimes focused on liquidity as well as bank and non-bank interactions so this is certainly working progress but as a supervisory approach you know stress testing has really become very important now we have done quite a bit of work so this includes Erland who has agreed to step in to moderate the panel Erland and other colleagues here at the IMF as well as at BIS and other institutions have sort of looked to evaluate the effectiveness of microdentropology and I would argue that perhaps the most compelling evidence is you know by looking at the downside risks to GDP so this is very much related to work that I did with Nali and former colleagues from the New York Fed as well you know on growth and risk so understanding sort of like the the downside of the forecast distribution as a function of financial variables and so the IMF colleagues so there's a very nice paper by Brandao and others as well as the earlier work by Erland you know are looking to what extent sort of like the usage of microdentropology is mitigating downside risks and so this is using sort of panel data across countries using the microdentropology database that we're collecting here at the fund and the right chart gives you one indication and the other studies like that that sort of show that there's less downside risk so there's less growth at risk when you have microdental tools so I think this goes in the right direction you know as was indicated earlier it is hard to measure sort of like the outcome of microdental tools but with this cross-country approach and this sort of like you know growth at risk which is kind of like density forecasting you can sort of show that you know the GDP forecast distribution the lower tail is less pronounced with micropro I think that's a reassuring finding at the same time there is quite a bit of evidence that you know the magnitudes really matter and you know systemic risk and financial crisis are inherently about non-linearities and so having not enough firepower can be problematic so here I'm showing for example also from a paper by Orland a mortgage default rates rising non-linearly with debt service so you know if you use these borough based tools but you don't have enough you may actually miss the non-linear amplification so having a rigorous quantitative framework to understand how much is the right amount is certainly work in progress and given the only now emerging evidence this calibration is certainly work in progress so this was my backward looking path so let me come to the forward looking path so I thought I would focus a little bit more on the inflation environment in the post-GFC world so to say so we have certainly seen a world with more shocks in the past four years and we may see more shocks there's a lot of hope and the central focus is one where inflation is coming back down in the major advanced economies such as the EUR area and the US but also around the merger markets have already seen central bank easing monetary policy as inflation has moved in the right direction but of course there's a lot of risk around that and we can't exclude that inflation may flare up again may be more persistent and outside of the baseline there's certainly the risk of a need for further tightening and this kind of risk to inflation may be something that could persist we don't know for sure but rates are certainly indicating that there could be more inflation risk going forward there could be more volatility in supply shocks commodities but also supply chains there's a lot more geopolitical risk the current inflation and disinflation episode is pointing to non-linearity in the Phillips curve which could be triggered again on the way up and the way down and so there could be financial stability risks triggered from persistent inflation so historically it's certainly the case that financial crisis are often times preceded by monetary tightening and when you look at bank balance sheets but also non-bank balance sheets there's substantial amount of duration risk everywhere and so tighter monetary policy especially sudden tightening of monetary policy could trigger sudden valuation losses the most dramatic illustration of that is of course the LDI episode in the UK last year but the SVB episode is also an example where the supplies to the upside of inflation and then shift in the yield curve trigger the stress and in the number of institutions and SVB was the furthest in the tail here but if we look in the GFSR that came out last week we look at a severe stress scenario around the world around 29 countries including euro area countries US and many major markets and when you put on top of this very sharp rise in interest rates if you put a stackflationary example on top of that we do see quite a bit of weakness in the banking system as well so a weak tail of banks that would be exposed to the stress of you know higher for longer and associated with the global recession and so while I fully concur that you know you want to aim at fully divorcing the adjustability for monetary policy and you want to develop all the market potential tools to achieve that divorce you know given any level of prudential policy you know you may still encounter trade-offs at some point right and you may fix that afterwards by tightening but you know we are not certain that prudential policy is quite enough to withstand any rise in interest rates and that again we saw very much this year and so there could be unpleasant trade-offs unfortunately even though we aim to not have those trade-offs those trade-offs could you know could occur so at the moment here at the fund we are doing sort of like work based on a blog that I put out with PureDBA earlier this year and that really goes back also again to work with Nelly some years ago on how to think about monetary policy and financial stability and I think that you know one so that tools are like broad things so one thing is ex-ante regulation so the more buffers they are the less likely the financial system will end up in a stress situation and then then the exposed tools which are essentially liquidity provision tools and the systemic risk exemption that was deployed in the US was already mentioned you know this is for example not available everywhere for example in European countries there's no systemic risk exemption and of course you know European banks are perhaps regulated more strongly than those regional banks were in the US but then again it's hard to exclude that there wouldn't be at some point such a tail event where such so like liquidity spillovers could be necessary so you know the fund had always argued that systemic risk exemptions would actually be a quite sensible addition to the emergency liquidity toolkit and you know how aggressive the discount window can be landing is also quite different across different countries so what can be done by the discount window so the kind of emergency facilities that for example the Federal Reserve put out in March would also not be possible necessarily in other countries so I think that what we may find is that potential tools may not be sufficient ex-ante and crisis management tools so they were sufficient in the UK last year and this year they may not be sufficient in some cases and at that point central banks could be caught in this unpleasant trade-offs you know having to so like a trade-off between inflation goals and financial stability goals now for emerging markets the situation is even worse because when you have a fiscal dominance problem right I mean then easing monetary fallacy in the face of financial stability problems could create even more you know more problems down the road and undermine credibility so they can't even have that trade-off in some sense so you know there's really no tool left and you know you have to go for the financial stability, raise rates even if it impacts your domestic financial sector significantly so it's even more unpleasant when you have fiscal dominance problems or credibility problems so I think the punchline and this is my last slide is that you know having sufficient ex-ante buffers is very much first order and using counter-seeking of the buffers in a proactive manner so that you don't have to face these trade-offs when back chocks hit I think that is one of the major lessons you know it's hard to imagine that we will ever be at the place where we are insured against all chocks but certainly you know the direction of travel is to keep moving to fix any gaps use the tools to complement the more structural measures deploy liquidity emergency tools to both banks and non-banks to act exposed but you know still you may end up with some unpleasant trade-off and then come back to Ireland great thanks Tobias yeah I thought perhaps I'll throw a question to the panelists which goes back to the you know challenges that we've been accustomed to in trying to regulate banks and borrowers we just heard from you know the discussion in the previous session that it was important to regulate leverage now the question is do you regulate the leverage of the banks or do you regulate the leverage of the borrowers do you need to do both to achieve the first best what if regulating the leverage of borrowers is harder to do perhaps for political economy reasons perhaps because you don't have the mandate to do it what are the implications of that do you then try and compensate by regulating bank leverage perhaps even more raising capital levels perhaps even more and if so is that effective really that we're going to have even more of a leakage towards provision of credit by non banks perhaps it's a question I'd like to ask perhaps a class to come in on and Vaz who I think also has a good experience with Ireland well thank you I think this is of course an excellent question and I touched upon it when I mentioned the fact that as a macroprudential authority usually you have leverage over bank leverage but you don't have much leverage over household and corporate let alone public sector leverage I mean it's a given that in all of our tax systems we have tax deductibility of interest expenses so the tax system clearly has a preferential treatment for debt over equity when it comes to the corporate sector well in countries like mine unfortunately there are still interest rate tax deductibility also for mortgage holders so there are forces that are clearly working against containing leverage at the borrowers and although in my country we had a fierce debate after global financial crisis of tightening loan to value standard and we made progress that's not be any mistake about it but we didn't make as much progress as we would have preferred I mean we made progress in the sense that the maximum loan to value limit now in the Netherlands is 100% it used to be between 120 and 130 and so there was a lot of additional borrowing taking place now this sounds of course very crazy and it is it was but of course you also have to keep in mind we have a fully funded pension system so if you work 5 days a week roughly 1 day a week you already work for your pension which means that saving out of your current income to make a down payment for instance for your first house is pretty tough if you already have mandatory saving of 20% of your income for your pension in fact that we have higher loan to value ratios I mean to some extent is a flip side of the whole financial structure including having this fully funded pension system but of course clearly we would have preferred to go down to let's say 90% of loan to value now we did get a mandatory a monetization requirement which we also didn't have before 2013 so the situation is now much better I would argue and that also shows for stress tests 2008-2013 no less than 1 out of 3 mortgages was underwater in the Netherlands 33% if we did a similar stress test so we simulated a similar decline in house prices then we had between 2008 and 2013 then now roughly 8% of our mortgages would be underwater so that is progress I think but we have come to acknowledge that in terms of pushing the government to restricting loan to very long to income we probably reached the limit of what they find acceptable if you were to restrict it further you get into discussions of young couples had denying young couples access to the housing market which politically is quite fraught so yes at some point we have concluded okay this is as far as we get with borrower based measures but then we have to make sure that at least we try to isolate the financial sector as much as possible from the swings in the housing market that will inevitably be the consequences of these policy preferences in my country and that is why we have been not only active in activating the counter cyclical buffer but we also introduced a risk rate floor on mortgages over and above the Basel international framework now the Basel framework the Basel 3 will greatly increase risk rates on mortgages but unfortunately implementation in the EU has been postponed quite a bit until 2027 to 2032 and we didn't want to await that increase in risk rates and that's why we unilaterally introduced a risk rate floor on mortgages to already move forward these higher risk rates that would normally come if there was full implementation of the Basel 3 requirement so yes there was some overcompensation in short of the fact that we had to accept the limits of what we could do on getting the governments to move on borrower based measures thanks very much this ultimately goes to the question of the interaction between tools and about this a lot and ultimately there are directions between couple based tools and borrower based measures but we do see them as complementary interventions because we always start by kind of thinking what is the friction or externality or the risk that we're trying to address and there is a lot of evidence that this rapid growth in indebtedness is followed by both financial stresses and also deeper connections this over indebtedness channel which has macroeconomic effects and of course this can be at its heart because of unsustainable lending standards which feed this cycle between credit and house prices and you see this in understandable growth in indebtedness so one response to that could be raise more capital or rate couple buffers which of course will give you a sense of lenders but in and of itself that would not guard against the indebtedness over indebtedness externalities and these big cuts in spending that you see in periods of stress which have broader macroeconomic effects and ultimately damaging for everyone so we do see this as as complementary but they do interact mechanically so when we have seen in Ireland risk weights on loans that have been issued under the mortgage measure which are under much more sustainable lending standards have lower risk weights than those that were issued before the financial crisis under under IRB models so there's also a mechanical interactions between them but we see them as complementary okay perhaps then I'm not sure whether nearly or to be as want to come in on this question if not I would I would perhaps take it to the frontier issues also to some extent and there I did want to ask Nellian and perhaps starting with Nellian and vast because on the non-bank financial institutions both of you mentioned that you had taken essentially domestic action so the actions that were taken in response to the FSOCs recommendations on the money market funds were a domestic initiative and I think also the regulations that you have done recently trying to regulate leverage of property funds something that you've done domestically so to both of you the question of you know how what's the boundary of that or what's the limit of that domestic action in the space of NBFIs and where then do we need the international agreements to come in perhaps at the FSB level and that of course is also something that perhaps class can give his perspective on. Thanks Arlen, maybe I could start can I just start by making a comment on your previous question just to add a bit of pragmatism to the question as opposed to conceptual I think there is a broad issue of thinking about applying capital or LTVs as the tool it's just how easily is it for activities to migrate out of the banking system to the non-bank system and that varies quite a bit outside of residential mortgages in the U.S. for commercial real estate half of the debt the loans outstanding are in non-banks and half of it is at banks so one might have to absolutely think about that differently and so I just do and then the other piece the pragmatic piece is what actual tools exist in your country that you can implement a broad widespread LTV is not easily done would need to be negotiated among many many regulators to implement so those are issues I think that come up aside from conceptually which one are we going to be able to get on the NBFI question you just raised we did for money market funds I think that is an action that domestic is useful and probably gets most of the resilience needed for the U.S. I'm not sure and others in the panel and the audience would know more about the European money market funds I think there are some significant cross-border concerns as I understand it for example many of the UK money market funds are domiciled in other parts of Europe so a domestic action would not necessarily be as helpful and so in that case FSB principles and guidelines are extremely helpful class mentioned earlier money market funds and trying to close liquidity mismatches and open-end funds are to the priorities for FSB right now just I'll stop there you just very briefly on this I think I would say that certainly my starting point is that it does need to be globally coordinated as a starting point I mean capital markets are inherently global and it is going to be very difficult to have something effective unless you have global coordination hence why of the work of the FSB that class will cover in our own focus is very much in engaging with this work because it will start at a global level FSB level then it would translate into kind of European frameworks and then domestic frameworks the LDI fund example that I mentioned which was a supervisory intervention even that was coordinated with other authorities in Europe because we did see actually that in terms of the location of the LDI funds that were investing in the UK Guild Market was a small number of jurisdictions but again coordination was really important because otherwise the risks being ineffective property funds was a little bit different because there we looked at the structure of financing of the commercial estate market in Ireland we did see the significant growth in investment fund financing of CRE and we kind of did it and as I mentioned earlier they are kind of big proportion of the stock now so this scenario where we we did introduce measures but in Europe we also have a kind of it's not we don't have a reciprocation framework but we have structures that if we were to observe leakages we could look into this and engage with supervisors abroad I think it's good to keep in mind that there are still important differences between banks and non banks and also in the way they are being being supervised I mentioned already you have to walk before you run if you want to think about a good macro prudential framework for NBFI you first need to have a good micro prudential foundation to build upon but bank supervisors always have had a logical and good sense for what financial stability means because typically banking crisis have often been systemic etc so bank supervisors think in terms of prudential requirements think in terms of systemic risk etc the security market overseers community does not immediately have that mindset they have a mindset of investor protection but that's not necessarily the same as financial stability so what I think we still need in that area first we need better micro prudential foundations so more robustness and resilience within individual entities of the system we need the supervisors to also not only trigger their supervisory tools when investor protection is at stake but also possibly from a more systemic wide perspective when there are financial stability risks originating systemic liquidity crisis being built in the sector and that means that we're not yet at the far of I would even say relatively far from the level of advancements that I think we've been trying to build over the last 15 years on the banking side many of the tools are there and we know them think about redemption gates swing pricing on the liability side asset bucketing on the asset side so it's not that the tools are not well known but I think these are all used only in the context of investor protection and what we have to get the supervisory community to move in the direction that these tools should actually also be used when there is systemic risk building on the horizon so that's what I called repurposing of existing tools now is that enough I don't know but at least we first have to make that step and then in the second step we may want to think okay do we also see any potential for developing separate macro potential tools which don't build up build off the micro potential which are not simply an elevation of the micro potential instruments and on that one of course we need to be open minded but I must also say that if someone makes the case to me that we need to have separate macro potential tools and say okay what are you thinking what kind of tools are you thinking about I don't get a very sort of convincing answer yet so of course we need to be open minded we need to be agile but I think most of the potential lies in first strengthening the resilience within the individual entities and then secondly bringing this financial stability perspective into repurposing some of these tools great thanks for those answers time is running fast we have NBFI's to some extent we haven't even touched crypto and climate even though class you mentioned those areas in your initial remarks I think given that we only have seven minutes left in the program perhaps will turn to the audience as well and see whether there are questions for the panellists okay perhaps wait for the microphone and then just identify yourself before you ask the question thank you Alastair Bank of America so just on NBFI's again please so the Central Bank of Ireland has now 18 things it looks at and when judging its counter cyclical buffer I think the near the Landershire banks got 26 right so you've extremely well advanced and as you've said class you're already in the point of putting bank capital for not bank capital things really the fact that LTV's are higher than you'd like in the system elsewhere the NBFI is very conceptual still where you're going with that I mean how long do you give yourselves you've made this much progress it's taken 15 years in banks let's assume that's broadly done what's a good time frame because it feels like it could be fairly pressing now that LDI certainly was in the UK it was only fixed by bringing down the government so it's quite quite a big deal at the time thank you I mean we live in democracies luckily so but that means of course that we from the FBI's from the FSB side we can sort of issue and develop global standards then usually of course these standards need to be translated also by the sectoral standard setting bodies and then they need to feed into legislative processes in our jurisdictions on which the political system has an impact and that's why I say we live in democracies so what we are trying to do on the FSB side is to speed up our sort of our phase in this coming up with recommendations as much as we can so we have issued strengthened recommendations on money market funds which are now to be implemented the US is close to implementation all the jurisdictions are close to implementation unfortunately in Europe we will have elections so the commission has decided to relegate this to the next commission which is the type of delay that unfortunately is the fact of life that we can't do much about on open ended funds we are now in the process of finalizing the recommendations we issued recommendations for consultations earlier this year consultation and responses have come in and we're now in the process of finalizing it but then of course also these need to be adopted we work in conjunction in cooperation with IOSCO the sectoral standard set of that but then again they need to be implemented in the national legislative processes which will take a little bit of time and I didn't even talk about so much about margin liquidity preparedness for higher margin requirements and the important work that we still need to do on better detecting these pockets of hidden leverage because that continues to be a problem in the NBFI sector all the the instances that I also mentioned in my introductory words they all had one element in common all of a sudden there was leverage popping up somewhere where we had not spotted it before so that is work that where we are still on the ball that's for 2024 actually Nelly is going to lead that work then also have to lead to recommendations yeah and then that all needs to be implemented so a couple of years is the bare minimum that processes like this this will take unfortunately it is or it is but that's I think it's a worthwhile price when you cherish living in a democracy like I do Pablo de Castro not just bank investment management it feels as a willingness to take more frequent so make more frequent macro-prudential adjustments and the feeling is that from the point of view of the market we already live in a world in there which we are seeing relatively frequent changes in regulation so the goalposts seem to change with relative frequency have you got the feeling that that increases the cost of equity for banks to the extent that it becomes bank equity becomes an asset class in which you are not sure exactly what you are buying because the rules of the game change with relative frequency and the question is at what stage does that become a problem thank you I can pick that up so I mean I think two thoughts maybe so one is there is the these are relatively young and new frameworks I think at least in our experience part of the changes that we've made have been because we wanted to review them which is good practice in policymaking and to be thinking about what we've learned over time and what adjustments do we need to make over time as these frameworks mature they should become more systematic hopefully in some of these adjustments because we are learning and responding to those things might reduce but of course the bank capital framework at least and certainly elements like the country's capital buffer are intended to respond to the risk environment that is their design and the risk environment is constantly evolving so I think there is also a dimension of we have to and the world is realizing that there is an element of bank capital regulation that it is more dynamic by design to respond to the risk environment we'll have time for at least one more question David thank you Tobias talked about the need to be proactive in building buffers and adjusting to the risk environment what should we be doing right now with buffers what's your sense are we at a neutral stage or should we be above neutral or below interested in newbies who wants to take that class first of it's a very difficult environment now because there is I guess the reason not to build buffers is always prosyclicality right? that's the argument that at some point you can't hear it anymore but okay but now probably in the current environment there is reason to actually worry about prosyclicality since the economy is clearly slowing down credit at least in the euro area credit demand is slowing very very strongly that's a feature of the monetary policy it's not a bad feature but it is what it is so at this moment I think there are some reasons to worry about prosyclicality of significantly strengthening macro-prudential macro-prudential tools at the same time the banks are still quite profitable so asking the banks to set aside some additional capital is still possible so it's a difficult call I already mentioned with hindsight I think 2022 is actually a missed opportunity because in 2022 you heard the same argument about prosyclicality and some in some countries country-scyclical buffers were still strengthened but there were also other countries and also the larger countries in the euro area that unfortunately did not use the opportunity in 2022 because of fear for prosyclicality but if you look back 2022 I mean profitability was good economy was strong but risks were building up so with hindsight that was the time to do it so that shows how difficult it is to make an excellent assessment and if you're risk averse people and we are a central bankers and supervisory community we always see risks right I mean the word crisis is never far away in audiences like this then there might be actually that might be one of the reasons for inaction bias that we are too fearful of crisis and too often afraid of prosyclicality could I add to that comment just to build on Klaus's response I think the point about 2022 is exactly on currently banks have started to tighten lending standards for commercial C&I loans and for real estate loans especially commercial real estate in the US and a lot in the UK and European economies and I get one important question in terms of whether you would want to build a buffer is to what extent the tighter lending standards reflect capital constraints you know if they're already feeling that that's a constraint then you may not want to like tighten I don't know how one empirically disentangles that it feels like a good research project but I think that's like one of the considerations for thinking about whether you'd be leaning into already a tightening cycle like it's too late or there is still time I think the interest rate and the real estate cycles might have different timing and so if you're thinking it's not necessarily too late if it's if it's you know just higher for longer interest rates just wanted to just add that point. Thanks I think it's a key question key issue to keep considering as we go forward into the continued tightening cycle and we can of course also discuss this further in the context of this conference but I think our time is up so unless someone wants to come back in or there are burning questions in the audience I would like to thank all four panelists Rasmus Doros, Tobias and Nelly online for their contribution today thank you very much