 So let's get going. Remarkably, there are only a few minutes behind schedule. It's late on a Friday afternoon. And I must say that all of you sitting here in the audience, very interested in macro-pudential issues are a very, very patient bunch, given that it's 4 p.m. on a Friday afternoon. I'm not going to give a long speech to start out, because I think it's much better if we just move to the panelists. As I kind of hinted this morning, I work in the engine room of the ESRB, and I deal with macro-pudential issues from that perspective and also from a national perspective. So maybe I add a few words down the road once the panelists have gotten going explaining how they look at macro-pudential policy in practice. But before we get into that, just a quick comment to the two previous speakers being both involved on the ESRB side and being the chairman of the Basel Committee. I 100% agree. The areas you have chosen are seriously under-researched. And that's an issue in itself, because when you produce these rules and regulations, you have like 50 to 70 people in the room. You keep churning and churning for years and years. And that's a negotiation. But it's very, very good if outsiders keep track of the end result, because sometimes we get it right, sometimes not so right. And that's why it's very, very helpful if outsiders try to understand what is happening in the system. So let's get going. We have here Matthias de Wotri-Pont, who is the vice governor of the National Bank of Belgium. And he's dealing with macro-pudential issues from a Belgian perspective, not the least thinking about risk weights and things like that, how to deal with macro-pudential measures. Richard Portes, a well-known professor at LSC, here in his role as the chair of the advisory scientific committee. And also, you have done a lot of work on shadow banking in an ESRB context. Paul Tucker, who is currently chair of the systemic risk council, but has a ton of practical experience when it comes to dealing with financial sector issues and financial stability issues in its broadest sense. And last but not least, Anneli Tuominan, who's director general of the Finnish FSA, where you're also trying to figure out what to do and what not to do in the real world when it comes to using macro-pudential measures. So Matthias, please go ahead. And then we'll go through the panelists. And then we'll discuss among ourselves and with the audience. Please go ahead. OK, thank you very much, Stefan. First of all, I think it's great to be invited to this first conference, which is, I think, as impressive as the ESRB is. I think there was a very nice talk this morning by Stefan and very positive about the ESRB. And I think it's really well-deserved. I like in particular the fact that you said, Stefan, that the ESRB is kind of vastly improving the macro-pudential culture in Europe. And, of course, it has to do with the general board, chaired by Mario. It has to do, of course, with Francesco and his team. It also has to do a lot with, interested by Francesco, by the ATC chaired by you, Stefan. And also, I think, by the advisory scientific committee, which I think is a great innovation because it's not the tradition in European economics that the economic policy that you had such a high level and so committed group of academics that are really helping. And I think it's really showing that this interaction means that 1 plus 1 equals 3 in this case. So I think it's really important. Now, in terms of being asked to talk about macro-pudential experiences, and, of course, thanks to another extremely important, as I've already said, thanks to the ESRB, we have all, in all member states, we have set up national macro-pudential authorities. And in the case of Belgium, it's a national bank of Belgium. And therefore, we have indeed started taking some measures. I mean, these are not earth-shattering measures. But I think there are some interesting dimensions which I think are relevant. And then I will briefly discuss them. So basically, we have done two things so far. Domestic CFE buffers and risk-weight add-ons for real estate very quickly. So one on the structural part of domestic CFE buffers and one on the cyclical part. And to make it very short, I think the Basel Committee has done a very good work on defining this GCFE methodology. And we have benefited from that. And we have adapted it to Belgium. And I think that works well. And you don't hear many discussions about that. On risk-weight add-ons, so the cyclical part, I think there we share, like a number of countries, the criticism about the counter-cyclical capital buffer, which is, at least for our country, not granular enough. Basically, one number is not enough in a world where, like in Belgium, we have insufficient small and medium enterprise lending, but excessive real estate lending. So I think you need something which is more targeted. And so what we went for was this 50% real estate risk-weight add-on. And there, and I think it was mentioned already yesterday or today also, basically, we were a bit surprised that it was so tough to be allowed to do risk-weight add-ons. So you had to go through 458 and these kind of things. Basically, I think CRDs involve too much in micromanagement. But so you can do floor for LGD or PD, but you cannot do an add-on. Why? And I must say I was not aware that we couldn't do that unless we asked for exception, exemption from both ESRB, which was quite cooperative, from EBA, OK2, and the commission less though. So basically, it's a whole previous debate about maximum harmonization and that. Why should member states do things different from what Europe is doing? So in the end, we were allowed to do it. But frankly, I mean, at a conceptual point of view, flaws assume implicitly that the problem with the lending is for the lower tail of the distribution. That is the loans that the banks consider least risky. It may be true, but it's not necessarily the case that indeed you're not penalizing the banks that are, in fact, more conservative in their lending. And more generally, we all like risk sensitivity, but basically introducing flaws mean you basically have a risk-weight compression. It's not necessarily what you want to do. All view was that this 5% add-on was applied to IRB banks. And so the view was we are not going to go into the detail of your models. We are agnostic about them. We're just taking basically we are observing that your risk-weights are back-tested on periods where you didn't have a real estate crisis. And OK, in the past, you didn't, but the future is not always like the past. So having a translation of your risk-weight is, as I say, an agnostic way of changing that. And I think so that was our idea. And the good news is that we managed to convince all the European institution that it was OK to do it. So far so good. And I think we are happy with that. Now, as I say, this is not only a risk-weight add-on. It's also targeting the real estate sector, which is where we had the excessive credit. The idea is very simple. And I think a number of countries share this view that basically when risks are building up in specific segments in the credit market, well, then it makes sense to go for more targeted instrument. In fact, there is empirical evidence. And I'll come back to that, suggesting that credit cycles in different credit segments, and in particular household versus non-financial cooperation, may not always be synchronized. And therefore, you would need to go for sectoral kind of cyclical capital buffers. In fact, there is evidence. In particular, in our last financial stability review, there is a paper by indeed the backer, the Wachter Ferrari Pirovano, who's in the room, and Van Niren Euser. Showing in particular, for example, in the last 20, 30 years, the correlation between the credit gaps, which is the instrument, the Barthel instrument, credit gap for households and for non-financial corporation, are in fact far from perfectly correlated. In Belgium, it's plus 0.54. In Germany, it's plus 0.75. Finland, 0.69. France, 0.68. Italy, 0.37. It's even negative for Austria and the Netherlands. I think over that period, only Spain and Portugal, it's close to one. So basically, I think it's important, and as I say, we are definitely not alone in thinking that, to think about refining a bit this concept of counter-seqical capital buffer to look also at more granular credit to GDP gaps. Then on another comment on the effect of the real estate risk-weight add-on, as I said, what we wanted to do is raise it to all the banks, being agnostic about where in the distribution of lending the bias was. And so basically, we have in Belgium, thanks to the lack of a real estate crisis in the last decades, we had a pretty low average risk-weight from internal models on the Belgian mortgage loans at 10%. Now it's 15%. And in fact, we are thinking about additional increases. Our main objective was to increase banks' resilience. I mean, there was this question yesterday about what is the goal of capital-based macroprudential policy. At some level, the simple one is you start from higher. Therefore, the problem will be less important. When it comes to preventing a bubble, let's face it, it's much more complicated. And I think we have to agree with Ricardo's comment. So as I said, clearly, the benefit is you gain on resilience. On the impact, and here I'm reporting on recent work that is about to be presented in our conference next month in terms of the reduction of credit growth. This is definitely not so obvious. Clearly, what we show is that more constrained banks are more affected, and they have increased lending spreads more. Also, banks that are more mortgage specialized. So I think all this is good because you're basically building the buffer more for banks that are more specialized into that. In the end, we are talking about limited impacts, 0 to 10 basis points of lending spread. Some banks, as I say, more capital constraint or more specialized in that going up to, I think, 15 basis points. I think, frankly, this is in line with the many existing studies on the effect of overall capital requirements on the extent of lending. Suggested that if you really want to limit a bubble, then you probably want to go to harder borough-based measures like LTV caps in order to really curb the cycle. And I think there, in particular, I think beyond this evidence for Belgium, one very nice set of studies concerns of Spain's use of dynamic provisioning, showing that, again, dynamic provisioning, which was capital constitutional buffer avant la lettre, was good in building up the buffer before the bubble burst, but not really preventing the bubble. And in particular, one thing which is very complicated, as shown in these Spanish papers, is that banks that are constrained may indeed limit their lending, but customers quickly go to another bank, which is not constrained, and then it is tough. So don't expect too much on that. Let's not be too ambitious on that. Finally, one comment on the institutional architecture of macroprudential policy within the banking union. As you know, while for significant banks, the ECB is in charge of microprudential supervision and national competent authorities help. In terms of macroprudential policy, it is a shared competence between the ECB and the national macroprudential authority. And indeed, it's a good idea. So somehow the financial stability people won the debate with the European Commission and the single market people, if I make caricature. And so we are not in maximum harmonization. The view is that indeed there are national or even regional shocks. So I think that is good that national macroprudential authorities do exist. By the way, it's not just the fact that we are in maybe a less than perfect monetary union. In the UK, they do macroprudential policy on London real estate, I understand. So indeed, there may be pretty granular problems. I've always found it a bit funny that in the US, they don't do regional macroprudential policy because clearly, even though in 2007 there was a US-wide real estate bubble, very often it had been a real estate bubble in Florida or in Texas or in California. And so I think they could consider regional macroprudential policy. Now, it is a shared competence with this idea of asymmetry that each side can top up, can be stricter than the other side, but cannot undo a stricter macroprudential stance at the other level. Now, at times, people say that it's about countering the inaction bias. When listening yesterday to John Connliffe saying that, in his view, the biggest inaction bias is whether we'll decrease the buffer in case of crisis, I think that doesn't. No, I think, frankly, this top-up option is not about countering inaction bias per se. It's about countering excessive softness or insufficient strictness bias. And I think, frankly, it makes sense because whenever you try and be strict at the national level, then your banking sector will come and say, oh my god, oh my god, level playing field, you can't do that. And at times, it works. Let's face it. Or, moreover, the political economy constrained. It's very unpleasant for unpopular politicians to make it harder for these poor young households to buy a house. Therefore, I think these are the key things. And these two biases mean that this top-up idea is a good idea. Some people have said, why not allow a more symmetric intervention power, for example, for the ECB? I think the problem is that if both sides are allowed to go up and down, and basically undo what the other side will have been done, basically, you will not converge. You will have credits. You will have policy cycles, whenever you don't fully agree. Of course, if you fully agree, who cares? But if you don't fully agree, there will be the risk of a cycle. So in terms of technical economics, we could say that there exists no pure strategy Nash equilibrium in this kind of case. So I don't think we want to change that. I think the current system where you can each top up is, I think, the right way to go. Thank you. Thank you, Mathias, and thank you for that very nice example of how you try to deal with this from a Belgian perspective when it comes to doing a few things within this field. What all of this is all about is market segmentation in one way or the other. And maybe it's heresy, but it's raising the interest rate without raising the interest rate. That's kind of the whole idea behind this. Sometimes we're not supposed to say that, but that's actually how it works. I'm going to disagree with that. OK, that's fine. That's fine. To the whole issue of regional constraints, as far as I know, they are struggling through an attempt to regional constraints in Canada because they have an enormous move in Vancouver and they also have a move in Toronto, but not of a similar magnitude. So we'll see what will come out of the Canadian experiment eventually. And that will be certainly be interesting to follow. Now please, Richard, floor is yours. Tell us what to do and what not to do. Thank you, Stefan. I'm not going to do that. But first, Mathias, I fully share your view that granular policies are great. But in the British case, London is a pretty big grain. So it may not be a very good example. So before I start, I want to second the remarks by Stefan this morning and Mathias too now about ESRB. I thought when I looked at this, when it was first mooted, first created the structure, this huge inclusive body that had 70-plus people on it, couldn't possibly make any decisions, and so on and so forth. And then when I first went to my first general board meeting, I was actually sitting at one end of this table and down at the other. I couldn't see who was down there. I give you this wonderful seating chart, and that's good. But even with the seating chart, it's hard to tell who's talking when somebody intervenes from the other end of the room. Still, a lot happens in the committees, and I may come back to that a bit. And the general board does make decisions, and occasionally it votes and so forth. And I think it has been very effective. Let me also second Marko's remarks about the prize papers. I, too, was on that review committee, and I can confirm the competition was very strong. So these are really outstanding pieces of work, and I'm particularly pleased myself that they're empirical papers. Now, two macro-pruit policy experiences. Well, I'm not a regulator. I never have been. I never will be. And still, ESRB needed someone from the advisory scientific committee to co-chair the joint expert group on shadow banking. So I volunteered for that, and that is a joint advisory technical committee, advisory scientific committee group. And I soon discovered that on this group, I was the only non-regulator. I am an innocent, naive academic. Me, supposed to co-chair this group of 40 people, all the rest being officials. I can say that the experience has been interesting. Challenging is what they usually say, no? Occasionally it's even more than that. The other day in a telco among several of us, I made a remark, and my excellent, ever vigilant co-chair immediately laughed and said, Richard, you just hit a hot button. I haven't yet had the chance to ask him why the button was hot, whom I might already have offended, and what line I crossed. But that's the role of academics. So what can I contribute here? Fortunately, the others on this panel do have firsthand experience. My natural response as an academic is to look at the evidence. And that requires going to the literature. Yesterday, Javier Soares expressed his disappointment that there's so little literature on the macro-proof policy stance. There seems to be more on macro-proof policy experiences and effectiveness. Still not enough. That's partly a data issue. It's not so much there a question of what's in the public domain, but rather a problem of short time series. Still, we do have cross-section papers and some panel regressions. And I'll talk about those in a moment. I won't talk much about shadow banking, which is the realm of that expert group that I'm on. And here the data still are patchy. We have, I think, made a good start with the first annual shadow banking monitor and the methodological and data paper that we published simultaneously with it. And I do strongly recommend these to you. Still, we've only begun to use the immense body of data that aren't the data that are now being generated because of the regulations, the AIFMD, e-mail, Solvency 2. All this is resulting in enormous reporting. Of course, the institutions involved will tell you it's far too excessive reporting, but nevertheless for research and for trying to figure out what's going on and maybe getting some evidence that will guide policy decisions. These are going to be tremendous resources. And I would note that the advisory scientific committee, if I can put it in a little plug here, started off the work on eMir data that Tuomas spoke about before launch today. Note also that academics can use these data, though they have to do so at least now in cooperation with ECB staff. I would like then to turn to some of the empirical evidence on macro-pru experience. And as I said, there is some relevant research. And let me just quickly go through some interesting pieces that have caught my interest anyway. One is one that comes from the Bank of England using panel data on 1,000 different macro-pru actions taken by 68 countries. And a very clear result comes out that I think is important, that when home authorities raise capital standards, the home non-bank sector borrows more from foreign banks, a kind of regulatory arbitrage. We'll see that coming out in another study that I'm going to cite in a moment. There's work by limb and colleagues on cross-country, using cross-country panel regressions, 10 macro-pru instruments, 49 countries. Again, you see the bodies of data out there are not trivial. Many instruments turn out to be effective, both in reducing credit growth and reducing its prosyclicality. AR and co-authors look at domestic regulation that constrains the lending by domestic banks and subsidiaries of foreign banks, that is to say, within the purview, therefore, of the domestic regulator. And what does this do? It increases the lending by branches of foreign banks, not within the purview of the home regulator. And that lending, that is significant. It, in effect, undoes about one-third of the fall in lending that was induced by the regulation. That's a rather important result, it seems to me. Ontario and colleagues find that another kind of regulatory arbitrage, that strict your home country regulation, increases the risk taking by multinational banks, risk taking abroad outside of the regulatory purview again. CISEL and colleagues in a very recent paper find that macro-proof regulation of bank credit induces a substitution towards non-bank credit, that is to say, my little world of shadow banking. These substitution effects are stronger in advanced economies than in emerging markets. And there are similar results in an earlier paper by Cheruti and colleagues looking at 119 countries over 14 years. And there is a growing literature of that kind. The IMF has a paper in 2014 showing that more stringent capital requirements brings about a growth in the shadow banking sector in various countries. We have case studies of a number of countries, especially on residential real estate mortgage lending. That's just a panorama of what I think is important that people should be looking at when they're thinking about macro-prudential regulation. But who cares about the evidence these days? We in the UK were told explicitly by a very senior politician, whom I shall not name, during the referendum campaign that people don't want to hear anymore from you experts. And indeed, he's not the only one. Our politicians in recent years seem to have moved away from evidence-based policy towards policy-based evidence. But I'm afraid to say the private sector talks similarly. I was struck yesterday by a report that just came out, a press report, of an extraordinarily violent attack on the Financial Stability Board by the Investment Company Institute, which is a trade lobby in the US that represents asset managers that are said to control in total $20 trillion of assets. So these are non-trivial trade associations. They said that the FSB should just stop looking at asset managers and leave that entirely to IASCO and national regulators with what they called, these are the people who have hands-on experience. I think this is for starters, this is a bit much from institutions that have pushed back at regulation because they say it has supposedly resulted in a dramatic fall in market liquidity. They, of course, ignore extensive empirical evidence to the contrary, amassed and brought forward by the Federal Reserve Bank of New York, by the Bank of England, and others. Putting that aside, the key point is that the raison d'etre of both ESRB and FSB is that you can't leave macro pru to national regulators only. Many of the systemic issues, justifying macro pru, have major cross-border elements. And I, of course, I agree with Matias, and I don't contest the studies that he cites about national differences. But I think these cross-national and global factors that I'm going to finish with are really important. Marco referred to the relations between banks and non-banks, between banks and shadow banks. And a little publicity, again, we, the joint expert group on shadow banking, are doing a study of interconnectedness between banks and shadow banks using the EBA data on exposures. And a first pass at the data here finds that about 60% of EU banks' exposures to shadow banks, to non-banks, let's call them shadow banks, were to entities outside the European Union. 60%, OK? And that, it seems to me, is a very important illustration of these last general points that I'm going to finish with. The international macroeconomic and financial experience, and that's really my game as international macroeconomic finance. That literature, the part of that literature that's relevant to macro-approved, establishes several points with which I conclude. One, there is a global financial cycle, and it is indeed global. And second, contagion from shocks is often also global. Should the French regulator, for example, this is just an example, not coming from the literature, but from experience, should the French regulator deal with the French banks' exposures to US money market funds differently from the way the German regulator would deal with its banks' similar exposures, given that the shock is going to be the same? If there is a major shock, both the French and the German banks may need dollar liquidity. And it would be nice to have some coherence and consistency in the way that decisions are made and that liquidity is supplied. Excessive credit growth coming partly from capital inflows is typically, of course, a global issue. There are obvious possibilities, and some raised in the literature that I cited before, for cross-border regulatory arbitrage. And finally, banks typically know very little about the supervisory treatment of their foreign shadow banking counterparts. And as I've said, that foreign exposure can be enormous. All this, I conclude, is strong support for the role of the ESRB and its committees. We are learning a lot about macro-proof through experience, through evidence, but there is now much more data becoming available, much more to learn. And I'm very excited myself to be part of that. Thank you. Thank you, Richard. And thank you for touching on these cross-border issues because that's something that all of us live within a European context. And Anili and myself certainly know a bit about these things in the Nordic Baltic region because basically all our banks are cross-border in one form or the other because all of them are all over the place. So whatever you do is going to be cross-border one way or the other. And it just has to be dealt with at the technical level. So Pa, what's up? Thank you, Stefan. What do you think about all this? Francesco, thank you for inviting me. It's nice to be at an ESRB event. Again, I was very glad when I occupied the UK seat on the ESRB, although it was not only, as Richard said, a table with lots of people around it. The table wasn't quite big enough so that I've never been at a more crushed table. Yes, Adair and I, we've taken turns, who would sit on whose lap for which the gender item. No, and can I just say that I'm delighted to find that Stefan is still the chair of the key subcommittee. I think that Europe has been very lucky, Stefan, to have you in that chair and to make the commitment that you have given both your domestic duties and the fact that you chair the Basel Committee. The second thing I should say is that the remarks I'm going to make this afternoon draw on a paper about the design and purpose of financial stability regimes that the Canadian think tank, Seagie, published a couple of days ago. It's very long, so I'm not urging anybody to read it. In a way, what Richard and Mateus have said sets up what I want to urge you, particularly those of you in the official sector, to think about. This morning we heard a really rich and fascinating exchange between Claudio and Vittor, which really was about what are the purposes of monetary policy? I think it's healthy that that debate is there, but if you think that we must have spent 25 years trying to think very carefully about the design of monetary policy regimes, what were the costs of inflation? Was there long-run neutrality, superneutrality, which instruments worked, et cetera, et cetera? There's nothing remotely similar to that body of work in the financial stability area. There isn't even a single paper that is stripped down in the way that Barrow Gordon does to demonstrate that there's a time inconsistency problem. And Olivier Blanchard and I have discussed this, the kind of political cycles that you get in, quote, macro-prudential policy. Is that to do with the shifting preferences of politicians, or is it to do with hyperbolic discount rates, or is it actually what a period by period social planner without changing objectives would do? It is absolutely amazing that there's not a paper that kind of pins that down. And I don't think when I was in office, I didn't think that mattered very much in 2009, 2010, 11 when we were kind of reshaping the world because we had to get on with it. I do think there's now a bit of a problem. And I'm going to give a couple of big-ish illustrations. But just drawing on what Richard and Mateus said, and I'm certainly not trying to pick holes on what you said at all, I agreed with almost everything you said, but it just illustrated some of the things I want to get at. So Richard, there are just endless, endless papers on the effectiveness of macro-prudential instruments. But I was brought up as a public policymaker to be effective at what? Effective at what? Objective. And it's having an objective and framing it within a regime that manages to harness expectational effects and gets you into a world of regime change. And I don't think anyone can know anything very intelligent about the quote's effectiveness of any of these instruments unless they are placed within a regime which has a reasonably clearly articulated and monitorable objective. Now, Mateus illustrated my concerns in a slightly different way in that he said fairly unequivocally that the objective ought to be the resilience of the financial system, whatever that means. I think one can unpack that. And for what it's worth, although this is going to remain bracketed for much of what I say, I agree with that. But then, as you described the various things being done in Belgium and around the world, when Stefan, you came in with Canada, I was left thinking, well, it's trying to dampen down the Vancouver housing market to do with the resilience of the Canadian financial system or is it to do with the misallocation of resources in Western Canada. Now, those are just a kind of preamble. The diversity in financial stability regimes, and I'm deliberately using the word financial stability regimes around the world, is extremely useful in terms of different experiments being conducted. But it reveals the degree to which there is no consensus of what financial stability policy is for. And I am going to start off with some exhibits, I'm afraid. So exhibit one is the EU Commission's consultative document review of the EU macro-prudential policy framework. And I should declare that I am a consultant. So I'm advising the EU Commission on the resolution of clearing houses. So I have to make clear that association. I've skip read this document. It's too long for anyone human to read. But I don't think that the purpose and objective of a macro-prudential policy framework is specified in this document anywhere. My second exhibit is a more recent paper by the IMF, the FSB, and the BISM, Elements of Effective Macro-Predential Policies, Lessons from International Experience. And it's a cheaper side, a fantastically self-referential document where the only things referred to are papers by the IMF, the FSB, the ISM. Lots of them, and extremely good. And some of them I've written before I retired. And they're particularly good. And there is a hint. There is a hint in this as to what financial stability policy or macro-prudential policy might be about, which is, as Mateus said, that it's about the resilience of the system. But quite what it means to have an objective of the resilience of the system, what it would be to set an independent agency an objective for the resilience of the system, and have the policymakers be highly insulated from day-to-day politics, is nowhere addressed. So that, too, I don't know really what that document is about, even though no doubt I would have agreed to it had I still been in office. The third exhibit is actually from the ESRB. And I am actually making an extremely serious point, but I can't help the joke stuff. And in paragraph 12 of macro-prudential policy beyond banking, an ESRB strategy paper, it says the ESRB regulation. So this is a law, defines systemic risk, which I take to be the purpose of the ESRB is the risk of disruption in the financial system with the potential to have serious negative consequences for the internal market and the real economy. And my very good friend, Vittor Constancio, one of whose speeches I'm about to deconstruct, which is not the reason why I say he's my very good friend, of course. He defines it similarly. At the European Central Bank, this is in a speech he gave earlier this year, Vittor Constancio, Principles of Macro-Predential Policy. And my summing up is going to be, well, we may have some principles for macro-prudential policy, but Vittor left out the key paragraph, which is, so what's the objective? And he starts off telling us, in a way, very similar to yours, the risk that financial instability significantly impairs the provision of necessary financial products and services by the financial system to a point where economic growth and welfare may be materially affected. I like that, and that's the kind of thing which the Bank of England has as its objective, I believe, because I helped write the legislation. But then Vittor goes on, when he sets out his principles, macro-prudential policy should be pre-emptive and strongly counter-cyclical. Well, so if you had an objective of resilience, where what you were concerned about is the collapse of the financial system, not the boom in itself, not the social costs of the boom, but the social costs of the bust, where the bust leads to the collapse of the financial system and the cessation or the suspension or severe impairment of the provision of the core financial services of payments, risk capital and credit supply, and risk transfer, you would be interested, mainly, in a static regime where you had crushed the probability of collapse to whatever probability you decided you wanted to achieve, which I will come back to, and you wouldn't start off, and you would say that first, and you would then have to explain why there was any dynamic policy at all, and the dynamic policy wouldn't be to do with curing credit booms per se. So there is something strange going on here, and I'll give you one more example, which I think reveals the extent to which this is serious. So in New Zealand, another very good friend of mine, Graham Wheeler, who I must have named for 25 years, has been setting LTV or LTI caps or limits or whatever on the New Zealand housing market for whatever purpose, something to do with financial stability, and they seem to work everywhere except in Auckland, so then they introduced LTI or LTV caps, limits, for Auckland, which in London, I guess it would just be parts of London, would you have to have Hackney as well as Chelsea and Kensington? Would you need the whole of Kensington, or would you perhaps not West Kensington, where I live, which isn't quite as rich? And you can see then that actually it's unlikely that the whole of the UK banking system would be exposed to West Kensington, or that the Canadian banking system is overly exposed to Vancouver, or perhaps even that the New Zealand system is exposed overly to Auckland. So what's going on? And the thing that is missing in all of these documents is what kind of social cost is it that we are bothered about? And there are two kinds of social costs that are associated with the pathologies, the frictions, the externalities, if you like, in finance. And one of these I've talked about, which is collapse, which we know is associated with the fire sales and interlinkages, and I like to add the discontinuities in bankruptcy. But there are also social costs from booms, that either economy-wide boom, credit booms, or sectoral credit booms, that do not end in the collapse in the financial system, because you have ensured that your financial system is highly resilient. And we may care about those social costs too, because they lead to the misallocation of resources and one manifestation of that is that they can lead to over indebtedness, which even when the bubble deflates, doesn't burst, it just deflates, may arrest, may produce economic headwinds of the kind that exist at the moment. And these two things seem to me to, if you're all trying to do the second of those things, which I think some authorities may be trying to do around the world, independent authorities, how are we the public to know how well they're doing? So when they have avoided or mitigated the misallocation of resources, how are we to know that actually resources were allocated, I don't know, completely efficiently, or only one standard deviation away from some measure of efficiency or whatever, and how are people to oversee all of this? How are we to know whether it is working? And there's some more I could say about resilience policy, but I won't. I'll sum up by saying, I think that there was a whole group of us, certainly including Stefan and I, who after the crisis were saying, this was a problem of missing regime. We had a regime for nominal stability, but we didn't have a regime for financial stability. And it seems to me that actually with hindsight, there was more than one missing regime, and there are lots of regimes that were missing. There's a regime for systemic stability or systemic resilience. There is a missing regime for what I think of avoiding national balance sheet vulnerabilities. There may be a missing regime for avoiding the misallocation of resources through financial booms. There's certainly a missing regime at the global level for international macroeconomic balance. And my worry is that the politicians, or some politicians and parts of the public, may think that you, those of you that are in office, can now do quite a lot of these things. And you may not be able to do some of them, and actually some of them may sometimes be in your mind on another occasion, it's not in your mind. And I think that is at the level of principle a deeply unhealthy place for independent authorities to be. But quite apart from my pedicadillos about the rule of law and democracy, it's not gonna be very effective. Only if you know and can convey what your objectives are, if you know what you're doing when you come in in the morning, can you harness the expectation of effects that are crucial to a good policy regime? Thank you. Thank you, Paul, on that note. I mean, one of the trade-offs here, and this is not so easy, and that's why you find so many different macro-pudential frameworks all over the world is to do with the whole issue. Who's supposed to say no? And who's supposed to have the right to do that? And there are different countries end up in different corners. My own country is a good example of that where the politicians have made it abundantly clear that they are the ones who are supposed to say no. So far, they have not been willing to say no, but that's a different issue. That's a completely different issue. They made it absolutely clear that it's not for civil servants to do it. And we don't know what the end game will be of that as of yet, but here you have the same timing consistency issues that you actually deal with when you discuss monetary policy. And these are, I mean, truly, truly difficult trade-offs. So, Anneli, tell us now how you are solving all this beautifully in Finland. Thank you so much. It's quite a challenge to talk after Paul. And first, thank you for inviting me to this panel. And second, I need to say how much I value the work of ESRB during the last years. In macro oversight, in providing benchmarks, in peer pressure, it's been really good. And without the ESRB, we wouldn't be here and we wouldn't have the framework in place. And what is also part of the richness of the ESRB is that we have all the different sectors, their insurance banking, securities, central bankers. We haven't maybe utilized all the things that we have, but in the future, I'm sure, with the growing shadow banking or the CMU, there will be more and more need for work in the non-banking area as well. And what, of course, is important from your point of view is that you get all the data you need in order to be able to do your work. So that is something that I really support. But if I may, I would like to touch upon three topics. That's domestic experience in macro prudential policy, then a few words about the instruments and then about these cross-border issues. If I recall correctly, so in one of the recommendations of ESRB, a recommendation was that the central bank should have a leading role in macro policy issues. In my country, my small country, we, the FINEFSA, we are the macro prudential authority. But as we operate in conjunction with the central bank, we actually benefit a lot from that cooperation, meaning that actually much of the macro prudential analysis we get from the central bank. And that's been extremely useful in our everyday work. And also what we have, we have excellent relationship with the central bank, but also during the preparatory phase, we have very good cooperation with the ministries and especially with the Ministry of Finance. And therefore, until now, we have managed to, on expert level, before we are at the decision-making phase, we have already managed to reach a consensus about the actions to be taken. And of course, cannot be the case always, but until now it has worked extremely well and smoothly. So that was the domestic side. And in our port, we have representatives from the central bank and the ministries. So all the different parties are involved in the decision-making process. But when it comes then to the instruments that we have been using and are supposed to use, so I have a few comments on those. So far, we have activated the outside buffers. We have LTV. We have gone through the counter-cyclical buffer process, of course, quarterly. And there one could ask why on earth quarterly in normal circumstances, because quarterly is quite often. I mean, the figures do not change that drastically. And as Matias said before, also there, we should really look at the assessment criteria. It cannot be only credit growth to GDP growth. You need to take household indebtedness and external balance of economy, other factors into account as well. But that also, I find it a pretty smooth process. So I don't have any complaints about that. But then when we have the IRB banks in Finland, some of them have very low risk rates. And when we started to think which instruments to use when we wanted to increase the risk rates, so it wasn't that straightforward. We looked at Article 164 and noticed that that instrument would actually end up with the wrong outcome. I mean, not the right banks would be penalized. And then we looked at pillar two. But as you know, in pillar two, you have many authorities who are the decision makers. There are disclosure issues because some authorities, micro-authorities, do not disclose the pillar two requirements. Then there's no reciprocity. And one bank becoming a major branch in the foreseeable future. So the reciprocity issue is very important from our point of view. And also, our banking sector is extremely well capitalized. So the pillar two wouldn't have any actual impact. So what we have left, we had the extremely, I hope I do not offend anybody, cumbersome and bureaucratic and time-consuming Article 458. And I cannot understand. I know that it's like the last straw that you should use. But I cannot say, I cannot understand why it has been made so difficult. And I mean, I would have thought, not your fault, Francesco, I would have thought that in everybody's interest that if you see a problem, you need to fix it. So why to make the fixing so extremely cumbersome? That is my question. That is certainly something that has to be solved. When it comes to the other instruments, the toolkits. So if I think of the instruments regarding really the existing loan stock, so we don't really have any instruments, as far as I know, regarding that. Because you cannot have any rules regarding amortization, regarding the current loan stock. You can only then tackle the new issuance. Of course, you can restrict amortization holidays, but that's another story. And what I think also that the exposure-based and institution specific toolkit in the CRR and the CRD4, that is pretty comprehensive. But I said this many times before that in the EU, we do not have a macroprudential toolkit of instruments which have proven, I think, the most effective. And I understand there is also experience of that. And these are the borrow-based instruments, like LTI, DSDI, LTV. And of course, we all understand that these instruments can be politically and socially extremely sensitive. And you do not become very popular when you activate them. And there might be a lot of political pressure. So therefore, it's extremely important that we get guidance from the center that we have a common EU framework also regarding these instruments. I understand that many disagree with me. But what I emphasize is that, at least in the design of these instruments, we would need to have more harmonization. When it comes to the application of these instruments, I quite agree with those who say that it should be with the national authorities, because the national authorities know best what they need in their domestic markets. But if you don't have any harmonization of the design, that would also mean that you couldn't, at least in my opinion, you couldn't analyze how effective these instruments in the real world are. And you cannot really compare different countries with each other. And also, about the sensitivity of these instruments, well, as I said in our legislation starting July this year, we have now the LTV. Well, it's not actually LTV, it's LTC, because after heavy lobbying in Finland, it changed its character, and now it's loan to collateral, and meaning in practice that it's a much less effective tool. But then about the European level playing field in the use of macroprudential instruments, well, when it comes to the OSI buffers, I don't think there's too much level playing field of consistency when it comes to their calibration. And some of us, macroprudential authorities, use a PLA-2 instrument, some do not, some disclose PLA-2, some do not. In the SSM, we have a topping up in other countries outside the SSM not. And the topping up, as was said previously, I think it's extremely valuable because it might be that there is inaction bias amongst national supervisors, so the topping up helps. So in concluding this part, I would say that we need national flexibility in application, but more harmonization in design. But then also my favorite topic, Stefan knows already what I'm going to talk about. Yes, you can almost say it without me saying anything. So in the current CRD regulatory framework, the supervisory powers of the PRAN supervisor, they are extremely limited in relation to parental supervision. And the CRD doesn't really recognize systemically important branches where they see the market share in their host country. So what I argue is that this PRAN structure as such is apt to weaken the macroprudential analysis in host countries. Because in my opinion, data and supervisory information of the home country should be made available also the host country designated authority. And I would very much prefer if the host countries could also play a role in the policymaking process. But of course, what is the most important thing is the reciprocity. As we know, in PLA2 and OSICE, there is no reciprocity. ESRB, you can request. But when it comes to the mandatory reciprocity requirements, I think, for instance, they should cover all exposures, whether they are through PRANs or cross-border transactions in the host country. So the host country macrogroup measures should be extended and cover all these exposures. And there should really be a level playing field between different banks in that host country. And of course, if the home country doesn't have the legal measures to do that, so the next best alternative is that it tries to use tool that has the most equivalent effect. Because I think it's in both countries' interest that the macrogroup measures are effective also in the host country. And having talked about the Nordic context, the Baltic context, banks operate cross-border or through PRANCs or at the moment subsidiaries. And of course, the risk is that there could be a lot of spillover effects. Thank you. No, Anali, I think our region is really one of the laboratories when it comes to cross-border banking. So your points are highly, highly relevant when it comes to dealing with this. In addition, you mentioned the difficulty of dealing with loan stocks. If you have ended up in a corner where you feel that the stock of outstanding loans is just too much and then it takes decades to work your way through that. And that's where it gets difficult also with whatever it is we call macroprudential, because then you also start getting very, very close to fiscal policy and monetary policy. Because both fiscal policy and monetary policy, they hit the stock immediately big time. While most of the macroprudential measures are kind of at the margin filling around, tweaking this, that, and the other. So in an ideal world, what we are really talking about is some kind of a policy coordination of the whole thing. But with these interest rate levels, they are not that effective? No, that's correct. But then you are essentially full circle back to fiscal policy, and then, of course, the whole thing becomes a highly political issue. Because you can easily increase the cost of borrowing by, for example, doing away or reduce the interest rate deductibility for tax purposes. And that immediately affects the entire stock. And this, of course, varies enormously from country to country. So we have heard four very, very interesting interventions. How one can have different views and reflections on what we are trying to achieve. Mathias, any additional comments to what you have heard? Well, I think, first of all, I agree with the points made by Andali. I think our various experiences are pretty similar. We also have a concern about, as a host supervisor at times. And so I think I share what she said. On Richard, I fully agree that cross-border link are really, really important. And I thought that his number on 60% of the links, if I understood well, of EU banks to non-banks were with respect to institution outside EU. That's indeed quite impressive. And on Paul's comment about, yes, indeed, the difficulty of macro prudential policies that it has a number of objectives. And at times, it's not obvious that they are defined so explicitly. And therefore, the issue of accountability can be a problem. At some level, indeed, resilience is kind of, even though you have to define it a bit better. But somehow, I guess, we are reasonably comfortable with what that means. But indeed, we are talking about more than that. The cyclical part on fighting bubbles. I think there, the efficiency is, I think, clearly much more limited. And more work is needed to try and improve the policy, the set of policy tools. And indeed, the whole question of what success means, I think, is very complicated. Because there is no counterfactual of them. So I think on that front, it is quite a challenge. Richard? Two quicker remarks. One on Paul's point about that the evaluation of the effectiveness of policies has to place them within the relevant policy regimes. Yes, sure. But you can do that in event studies. You can do that in case studies. You can do that in fashionable randomized controlled trials. But in cross-country empirical work, the best that you can do is just introduce as many appropriate control variables as you can with trying to retain a reasonable number of degrees of freedom. And that's, you know, you might say, well, all that cross-country panel data stuff is very weak because it doesn't situate each of the individual measures in its context. And I don't think there's any comeback to that. It's a Lucas critique, right? Sorry? It's a Lucas critique. Well, it could be. Yeah. It could be. But anyway, that's the other point about Annali's remark that there ought to be a common EU framework for the design of a number of these policies, including loan to value and loan to income ratio policies. What would you say then about the Bank of England's policy measure to impose particular loan to value ratios on a proportion of the high value property loans that are made in London in particular? Very specific. But Mark, you know, Mark Carney, I can recall him standing up at a meeting, I don't know, sometime less than a year ago with, he had one slide, the lovely slide. It showed the shift in the distribution of the values of mortgages that had come about after, I won't say in consequence of, but it's pretty obvious, after this measure was adopted. And it was quite impressive, very effective measure. It appears. And I think it helped to slow things down in the London property market now. You know, would common regulations permit something quite so specific and focused, is that? Paul? Two comments. In a way, I think, Annali's description of the branch point is probably a better illustration of what I'm trying to get at than any of my illustrations. So imagine you've got a relatively small country and a big country and a bank, a big bank from the big country has branched into the small country and it's got very loose credit conditions there that is pushing up house prices or whatever you like. But however much money it loses, it's not going to damage the bank. And the bank is completely committed to, I'm going to kind of impose this as an assumption, completely committed to being in the small country. So the resilience objective, it's just met. You just allow the bubble. And you say, well, actually, that's interesting. But there's something else going on. One other way to think about this, for most of the room, is an economist. I mean, if you think about Musgraves' three-fold categorization of the functions of the fiscal state, God, I don't know, 50, 60, 70 years ago, the allocative branch and distributional branch and the intertemporal stabilization branch. Well, central banking has typically been thought to be part of the intertemporal stabilization branch, nominal stability. And that was quite important in terms of re-establishing the extraordinary powers that Montague Norman and Benjamin Strong gave away, essentially. And we got them back in the 80s and 90s. Well, now you're in the allocative branch as well. And how far do you want to be part of that branch? This is a world of Pagoovian taxation, and cozy and property rights, and cap and trade. And how far are you going to go? And do the politicians understand what you're going to do? You are the most powerful, unelected people in the world after the constitutional courts. And in this area, you don't have very well-defined regimes. That's my first point. The second point, if I may make it, and this is something I made to the Bank of England staff again and again. People don't even know, in a world of transparency, what the sign is when you raise capital requirements, whether it's risk weights or anything else. Because it isn't like monetary policy, where since the 80s, early 90s, all of the data is out there. There's essentially no private information other than they're trying to top, they out there are trying to top up their view in a Bayesian way of your reaction function. In this field, you've got loads of private information. So if you say we're worried about X, and we are tweaking a macro-prudential capital instrument by delta K, for the following reasons. You're doing two things. You're both revealing your action, and you are revealing your concerns. So say that they are already worried about the market, and they're relieved that you have finally realized that something needs to be done, and that you've done more or less enough. In those circumstances, raising capital requirements may actually bring about an easing of credit conditions. Now imagine that they've got no idea, because they've all been in the exuberant phase of the cycle, delusional, Schleiferian, Myopia, et cetera. And you come out, and you say, well, we're doing delta K, and we're doing it because of this, because it's really awful, you know, in the case of DAB. We never thought about that. It's really awful. God, have they done enough? Don't know. You get a tightening in credit conditions. And I can give you loads of other examples, and you're going to discover this if you do it. Well, I don't care what the empirical results show. You are going to discover that as you do things and you reveal the information for doing them, you won't even know the sign in all of the circumstances, because you are revealing information. And this is in almost none of the papers about it. So ill-defined objectives, extraordinary insulation from politics, and you can't even be sure of the sign on the partial derivative. I mean, you know, this is really serious stuff. Anneli. I said the comments made before regarding resilience, and then one comment more I would like to make about the pround supervision being that we have extremely good cooperation between supervisors in Nordic and Baltic countries, but it might be that somewhere the cooperation is not that good, and the home supervisor is not that vigilant. So for that reason, we would need to something more firm, some legal base, and that is important. But the LTV instruments, they are now national instruments, so of course they can be of any design whatsoever. But there was one comment made that I think is extremely important, and the comment was, you cannot leave macro-pru to national regulators only, and there I could not agree more. And there ESRB is the one who is in charge, and what is also important that you are now starting to do the country analysis, because without that you cannot see the whole picture completely. Thank you, Annali, it's late in the day, but still if there might be a few questions from the audience, we can take two or three of them. Thank you, Jeremy and Zettelmeier. So the issue of granularity of macro-pru was repeatedly raised by different panelists, so at the end I was wondering, is there consensus on how granular macro-pru might want to get or not? Matthias gave an example, which seems very obvious, you wanted to distinguish between, say, lending conditions in the housing sector and among SMEs. With regional differentiation, I already find it not so obvious, for reasons that were raised by Paul. So if you assume that you have, say, nationwide buffers, so that the bursting of a regional housing bubble will not threaten the stability of your banking system, say, is it your duty to also prevent a regional bust? If, by doing that, you know that you're creating a trade-off by excluding even more people from the housing market. I don't know, I mean, there is no answer to that as of yet. It's just that, I mean, I think Paul and Annali and myself gave a few examples where these issues sort of pop up, but there is no kind of organized European or international conversation on this topic. It's just that it shows up here and there, and then you have to kind of deal with it as best as you can. I know from my part of the world, a completely different example where we mismanaged the whole thing, because clearly Swedish banks were quite helpful making the Baltic country go more or less bust. And it would have been helpful if that could have been stopped. And it was a huge mistake not stopping it. And that's kind of Paul's example when you have a large country lending a ton of money into a small country and you just can't get a handle on. I mean, I think you need to, your community needs to take these issues to the politicians. I don't mean tomorrow because they're not well enough thought through, but you know, you need to do sufficient research to be able to take the question to the politicians in a controlled way. Matthias. Yes, no, indeed it's a complicated question. I mean, I guess one can say that the optimal amount of granularity is higher than the capital consul cyclical buffer of bulk. I think that we can all agree on. Then indeed it will be case-backed. And there is a risk, we talk a lot about inaction bias. I think there can also be a risk of over-activism because it's so nice to push this button and that button and this button if we're allowed to. So I think it's a very good research question. Richard. This is where we, we do need research, we do need models, you know, is the issue here qualitatively different from the problems that face monetary policy in a reasonably large country? I can recall Eddie George going up and speaking in Newcastle and saying, you know, it may be that we have a policy that's going to, that's needed to cool things down in London, but it's going to create unemployment in Newcastle. Sorry about that. You know. Francesco, did you have a question? First of all, thank you very much for all the appreciations for the SRB. But of course we have to be also to a certain extent reflective on what could be the weaknesses and what may have not been gone wrong. So not well. So I wanted to ask you one question. This is a doubt, a question I have myself on this, this is the following that we have been constantly confronted with the question of the choice of time for action. At the beginning, for example, we had a big crisis. Everything was in a very severe difficulty. We have been operating with a great surface strain because we could not almost say nothing. Otherwise, issues would have been worsened. Now we have the problem that clearly the public opinion is less and less ready to support macroprudential. We have a problem of a political system which is much more and more oriented to the question of, let's say, jobs, growth, this type of things. So is there not the risk that we will be finally ready to use the instruments, know what are the objectives, understand what is the transmission mechanism, exactly the day in which the margins to operate in terms of what is the consensus in the society will have been decreasing very much? So who would like to answer? Maybe just, it is true that you do see in Europe a shift towards jobs and growth rather than resilience, in a sense. By the way, if it goes too far, maybe we'll go from post-crisis reform to post-reform crisis, and we can start again. Let's see. I think know the points that it's better to be ready and develop a toolkit. And I think this is something that the SRB has been really good at. And I do think that still, especially since granularity is part of the thing, there are quite a number of problems. And the willingness to address them is variable, depending on the place, depending on the politician. And I don't think the, I mean, today the counter-signical capital buffer, despite the fact that in some countries it's not granular enough, is being in use in a number of countries. So it's not that nothing is happening. I do think that in that sense, I think it's quite helpful. And let's pessimistic. With Matthias' comments, because you were not pessimistic, you sounded a bit optimistic, because it's late on a Friday afternoon, let's call it a day. Thank the panelists. But also, say a heartfelt thank you to many ESRB staff who in a more anonymous role have helped out making this a very, very successful conference. Thank you so much.