 Good morning to everybody Well, you know, this is the first panel that is going to be dedicated to the experiences of my potential policy You know on top of you know my job of giving the floor to the panelists that are the important people here I would like to make you know some comments on my potential policy That perhaps you know are relevant and for sure that will be Afterwards much more elaborated and developed by the by the panelists So, you know the first thing that I would like to stress is that my potential policy is a jaun policy It's really you know it starts to be mainly relevant and to attract the attention of policy makers Over the last 12-10 years is the beginning of the of the financial crisis In order to fill the gaps of much more traditional and classical policies as monetary policy or the classical the traditional super by supervisory function The characteristics of my potential policy my view are to fault the first one is a pre-emptive policy Is based on early warning indicators and try to identify systemic risks And secondly, I think that you know something that is also related to to be pre-emptive is counter-cyclical Contr-cyclical is key So it has to act mainly in the good part of the great cycle in the good part of the business cycle in order to avoid, you know the the build-up of bubbles the build-up of vulnerabilities the build-up of risks That could give rise to you know an aggravation of the of the downswing of the great cycle and the downturn of the of the business cycle so, you know the instruments of my potential policy have to be, you know put in place, pursued Especially, you know in the good part of the business cycle And this is something that is not always easy. What's the good part of the business cycle? What you know concrete juncture? We are we are now we are you know throughout the business cycle This is a very relevant issue and the question of the timing. I think that is something that it will be, you know, developed afterwards Well, the main instrument of macro potential policy undoubtedly Is the CCYB? The counter-cyclical the counter-cyclical buffer that has to be to be, you know applied in good times to be released in the downturn of the of the of the great cycle In order to smooth the evolution of the business cycle and the reason is to try to avoid the leveraging The avoid the leveraging and the contraction of great that is something that amplifies the business cycle There are two main kind of instruments For, you know, the implementation of macro potential Capital related to capital based instruments the most famous one is the CCYB And the second one is, you know, borrower based Measures borrower based measures have to do much more with individuals are Especially inclusive imply a limitation of, you know, the personal the personal freedom at the end of the day That's why this is much more politically politically sensitive and that's why, you know, governments and Parliaments want to be much more involved But in the case of CCYB normally, you know, it's in the hands of the population authorities There is another factor that perhaps not for sure that is going to be elaborated Further later on that is the relationship between macro potential and monetary policy Military policy, you know the target of monetary policy, especially in the case of the CCYB is for stability in the case of Macro potential the main Target is financial stability Both objectives in my and both targets in my view are Interconnected the reinforced each other Because price stability is totally is a necessary condition for for financial stability And with our financial stability is very difficult that the transmission of more monetary policy Can take place smoothly. So, you know, I think that some people try to put adults Macro potential policy and monetary policy and what I have to say is that in my view, they are totally complementary especially in recent times because Macro potential policy is especially relevant now taking the consideration the side effects of Monetary policy that have becoming are becoming more and more evident Finally, let me say something about the use of my compudential instruments You know, it's if you look at the importance of CCYB as a percentage of the total capital of the main European banks It's a very small percentage. It's only point 14 of the total capital of the banks. So Despite all the attention that it has attracted, but we have to say is that, you know, really in terms of relevance It's not much used and this is something that we have to take into consideration And I hope that afterwards we will have explanations. Why you know, this instrument has not been Implemented as you know as implemented as many consider that just to be And finally well, we talk a lot about Macro potential in the banks, macro potential in the banking industry But I think that there is a new area that macro potential could be applied especially taking into consideration the recent evolution of You know, the asset management industry referred to the mutual fund industry They have Accumulated much more risks lately They have much more volume a much higher volume of assets under management The leverage is also much higher and I think that well macro potential policy should start to be developed Also in the area and the space of the asset management industry So having said that, you know now I will give the floor to The panelists the first one is going to be glass not well, you know, you have been introduced You have 15 minutes in order to give up the words, you know a certain Certain time for the debate and for Q&A with the audience and so plus just start thank you Thank you, Louise. I prefer to speak from the podium because that's probably a little bit easier I have a couple of slides to illustrate what I have to say, but let me before kicking off start the organizers of the conference To invite me as a speaker on the Dutch experience with macro potential policy And I just want to take the opportunity here also to underline everything that Francesco said in his opening remarks This is of course all hard work where people like me are profiting from having a nice podium, etc But the work is really done by others that should also get the credits for doing the work But it's my task to then explain to the outside world The fruits of the work and the and the policy choices that underline them and this is what I want to do for the Netherlands and as you will notice the ESRB and particularly the recent Recommendation that came out on Monday will also play an important role in my presentation so Talking about the Netherlands It's it's useful to start with a couple of dimensions that are I think important First of all, there is a distinction between risks that are coming from the international scene for the small open economy Like the Netherlands very important versus risks that are sort of of domestic origin and Secondly and that's related to this distinction It is also important to keep in mind that some of the risks you can actually try to mitigate But for others and particularly the ones coming from the international scene There's little you can do to mitigate them and the only choice you have is try to build resilience in the financial sector to actually Shield yourself as much as possible from when these risks emerge Now this is our analytical framework for assessing financial stability risk. This is a risk map We draw twice a year in our financial stability report and it has no less than four dimensions So it takes a while to fully grasp what's in there But I'll zoom in on only a part of it the first dimension is if you look at the Sort of vertical axis axis whether the risks are coming from the global the European or the domestic scene on the horizontal axis whether the risks are actually fast-burning or slow-burning The size of the dots is an indication of how material we think the risks are and the color Red means that they have recently increased or are on the increase gray means they're stable and I hope someday that I can also show a chart with some green dots Which would actually imply that the risks are being reduced? Unfortunately, there are no such risks now now zooming in a little bit more most of the risks for the Netherlands are actually international and Well, if you look at the dots there It will not surprise you that they're not all that different from the risks that are also identified in the IMF's global financial Stability report or in the ECB financial stability report Those are sort of the risks that play a role on the international scene that play a role in the discussions We're also having within the financial stability board. It's a standing committee on the assessment of vulnerabilities that I happen to chair And these I think are pretty well known But what I want to do today is focus a bit more on the national risks Suffice to say here that these are risks where we from the standpoint of the Netherlands Bank cannot do much about It's origination again The only thing we can do is build buffers in the financial sector that when these risks materialize that at least we can absorb them as much as possible Today, I want to zoom in on the what I see is the main Domestic risk and that has to do with the housing market in the Netherlands with sort of private debt and particularly Mortgage debt that is a very important vulnerability That has been with us for quite some time And this is also the vulnerability where the ESRB recommendation is is directed toward that was issued last Monday So first, let me summarize what's in the recommendation And then I'll elaborate a little bit on how this developed and where this recommendation fits in It's a four. It's a recommendation with four legs First of all, there is the financial stability committee in the Netherlands that advises the government on Taking certain measures like for instance the borrow based measures borrower based measures are governed by the government They're not only Decided on the basis of financial stability, but there's also a strong culture of owner occupied housing It's almost I would say part of the religion in the Netherlands And that is why there is also political opposition to activating borrowing based measures only based on financial stability grounds But we have a financial stability committee that advises the government on them I happen to chair that committee the Ministry of Finance is present the conflict of business Authority is present in the committee and the recommendation of the ESRB is to strengthen the role of the financial stability committee and to give it a formal comply or explain Sort of procedure that the government cannot simply ignore what is advised in practice This comply or explain is already there because the government always explains itself quite well, but here it would give a formal status The second recommendation is also directed at the government is to tighten loan to value and to I would say make the loan to income Regulation that we have more effective not necessarily tighten it, but make it make it more effective less percyclical The third one is activation of capital based measures And that's the only one that is directed toward us as prudential supervisor That's not directed toward the government and then the fourth one is to think about some structural changes Reduce the mortgage interest rate tax deductibility at a rapid pace Make sure that some of the impediments to housing supply are actually overcome in the Netherlands So some structural changes that have to do with the importance of myth housing prices the functioning of the housing markets and therefore also The size of the of the mortgage debt in the Netherlands now on many of these scores a lot has happened already But the recommendation correctly observes that more needs to be done And that's a view that we also subscribe to at the Netherlands Bank So let me first have a look at sort of the structural situation What you see in the chart here is household debt to GDP and yes on the left side of these charts That is the Netherlands. So household debt in the Netherlands is clearly higher than anywhere else in the euro area There are a couple of European countries outside the euro area that are more comparable to us But here I only depicted the euro area countries It's over 100% and roughly 90% of it is if it's mortgage debt Mortgage debt actually it used to be also above 100% So there has been some Leveraging taking place over the last few years, but it is still outstanding in its In its in its share now there are sort of a couple of structural reasons for this one There is still mortgage interest rate tax deductibility. It's being reduced, but it's still there It still exerts its its influence secondly, we are used to having rather high initial loan-to-value ratios of sort of newly originated Mortgages and thirdly a large share of the markets that is still non-amortizing That is all that that was Accumulated before 2013 since 2013 this changed, but of course this is a slow-moving process Because the old debts are carried forward. So part of it is still non-amortizing and that leads to to relatively high household debt For instance when housing prices Deteriorated from 2008 to 2013 by more than 20% normally And and more than 25% in real terms It led to a situation where many homeowners were confronted with negative equity In fact out of the seven million mortgages some 1.4 million So one out of five went underwater where the mortgage debt was higher than the value of the of the collateral The risks of that situation and that is this all something I always have to explain are not microprudential in nature So defaults or mortgages in the bank books are almost negligible That has to do with insolvency law We have a very sort of Calvinist insolvency law where the creditor has a very strong positions House evictions can take place in the Netherlands without a judge intervening of course you can call upon the judge if you feel improperly treated as a House owner, but there's no sort of automatic assumption that you would have first have to go to court to evict somebody from from his house and that's why Dutch households never default on the mortgage. They will always continue to serve as their mortgage Unfortunately, there are these direct effects that I depicted here on the right side of the slide that if you are in the water it leads to sort of uncertainty what you do is you reduce your consumption and Reduction of consumption then in a pro cyclical way sort of makes the situation worse in terms of the cyclical The economic cycle in terms of Increasing the downturn and that has an adverse impact then on financial institutions So the impact on financial institutions is indirect rather than Direct that's the point I tried to get across So what has been done? Well, particularly in 2013. I think There is there has been a couple of measures that have already been taken. So tax deductibility of Mortgage debt is gradually being reduced the maximum rate at which you can deduct is gradually being reduced over time It used to be 52 percent. It is now moving to 37 percent at the end of this coalition period But there is a general assumption that this will simply be prolonged until it is either fully phased out or phased out in a manner that is more comparable to sort of the way other wealth Items are being treated in the tax in the tax code secondly in 2013 from 2013 onwards Effectively when new mortgages don't amortize in 30 years you lose the tax deductibility Which essentially means that after 2013 all mortgages have become amortizing again in 13 years and also in 2013 a Loan-to-value ratio was introduced the maximum loan-to-value ratio before that there was no maximum loan-to-value ratio It was introduced at the level of 106 and then in six years time. It was gradually reduced to 100 percent Which is currently the maximum loan-to-value ratio now in 2015 the financial stability committee in the Netherlands Recommended to lower this 100 percent further to 90 percent Which the ESRB also very strongly agrees upon but political opposition is too strong Because it inhibits young couples from access to the housing markets, etc And that's why at this moment there is no real prospect of of this happening Unfortunately, I would add Next to the structural vulnerabilities. There are also cyclical vulnerabilities that are on the rise and that have to do everything I think with the residential Real estate price developments in the economy over the past three years on average House prices have been having growing by eight percent But that's a sort of national average and there are some parts of the country where house prices are barely increasing If you look at the big cities, then this is all double-digit house price appreciation for many many years in a row What we're also seeing is more risky behavior in terms of loan-to-income That sort of more than 90 percent of the mortgages has loan-to-income which are Close to the maximum and and that number is also increasing There are bidding practices that are quite unhealthy In nationwide 40 percent of the houses is being being sold at the price above the asking level and in the big cities That's even more than 60 percent You don't have any time anymore to do a sort of construction test by an engineer You simply have to accept the house the way it is and all the risks that are involved So this is all sort of signs of an overheated housing market Well, what can we do about it as supervisors? Of course make sure that at least the banks are better protected if things go wrong at the housing market Probably in the current low interest rate environment as little we can do about the sort of developments in the housing market itself Also, if there is no political appetite to tighten loan-to-value Regulation anymore, so the only thing we can do is make sure that at least the banks are sufficiently protected if the whole thing goes sour and so capital based measures the third of the four recommendation of Of the ESRB Usually they come in two ways You can either think about the counter cyclical buffer or you can think about increasing risk rates on mortgages Now the first option is activating the counter cyclical buffer This is the way the credit gap looks for the Netherlands So the blue line is actual credit growth and the the dark blue line is the trend Which I think is a hot Rick Prescott filter in this case You could use different techniques, but in any case this is not going to deliver you any case For activating the counter cyclical buffer on the contrary the credit gap is deeply negative The CCIB is also a blunt instrument. It sort of Affects all credit in the economy. Well corporate credit in the Netherlands is growing at a very very low pace SME credit is growing at a very very low pace. So there's absolutely no reason to activate any measures Geared toward corporate credit. There is really an isolated problem in the housing market and markets credit And that's why we opt we will opt actually for increasing risk rates What I've depicted here is the risk with the average risk rate on Dutch mortgages in the IRB portfolio of of Dutch banks Compared to the average risk rate in different countries. Some countries have also taken measures on on On these risk rates and that's why some of the parts of the bars are dark blue Actually, the light blue was where the risk rates were before the measures were being taken And then you can see that the Netherlands is actually part of the group of the countries that has already taken measures with respect to the risk rates and That's why we think we also believe that for us. This is the way to go We can do so under article 458 of the capital requirements regulation. This is something I always have to look up And but in any case this would be a measure that would help In our view Because it would be directly linked to the source of the risk Which is the housing market and the rationale is that we believe that the systemic risks emanating from the housing market Are not sufficiently reflected in the risk weights because these risk weights take a very micro prudential Perspective they only look at actual default rates. Usually they're backward-looking Well, if you have a strong appreciation of the housing market and of course the quality of the collateral has improved So micro prudentially have from a micro prudential standpoint the risks are extremely low But there are these feedback loops these sort of systemic risks that are not taken into account Into the way the banks themselves calculate the risk weight and that is the reason why we are thinking about intervening a last slide And then I'll stop it's always good to keep in mind that Mortgages are not only provided by the banks Actually the role of other providers is is growing This in and of itself is a good thing in the low interest rate environment There's a natural tendency for Dutch households to want to lock in This sort of low interest rates for a longer period of time So having a 20 or 30 year mortgage is quite common in the Netherlands where the interest rate is fixed for 20 or 30 years Well, if you look at sort of duration risk, etc. such a mortgage is actually a better asset for A company that also has longer term liabilities like an insurance company or a pension fund than it is for a bank So in and of itself this development I think is to be welcomed But of course it does raise the question on what kind of macro prudential tools would we have to also apply to these sectors? Borrower based measures in the Netherlands are generic So they apply not only to the banks, but also to insurance companies and mortgages extended by insurance companies or pension funds Unfortunately, we don't have any macro prudential capital based tools on these sectors yet So let me leave it with that Sort of what I tried to talk you through most of our vulnerabilities are international There are strong structural features that I think are being moved in the right direction But it takes a long time before all these are non amortizing mortgages sort of have moved their way out of the system Before the tax deductibility is fully abolished. Etc. Etc. There's limited political support for borrower further tightening I should say of borrower based measures and our macro prudential toolkit is mainly focused on the banks. Thank you Thank you class. You have almost adjusted Maria Thank you chair. I haven't prepared any slides for my presentation but I noticed that I could have borrowed some of classes because his story sounds so sounds so familiar but Leaving the Netherlands and going to Finland today I would like to share with you some experiences from conducting macro prudential policy in Finland First of all, it is of key importance to keep focus on macro prudential policy on addressing Systemic risks and vulnerabilities. This might sound self-evident But it is important to find a balance between institution-specific risks or micro-level effects and macro prudential policy when you consider the need for policy measures and their calibration The short-term and micro level costs of policy actions are also much easier to identify and measure Than long-term stability benefits of the policy. This is an everlasting challenge for the analytical work Second my experience is that necessary focus on systemic risks can be maintained through a committee type of decision-making structure in Finland Macro-prudential policy decisions are made by the board of the Finnish FSA the Finnish financial supervisory authority The board consists of representatives of two ministries responsible for Financial regulation Ministry of Finance and Ministry of Social and Health a representative from the Bank of Finland and at least two independent members This type of decision-making body has proved to function surprisingly well The white composition brings together Many different types of viewpoints It also is also provides a natural link between macro prudential policy and micro prudential supervision Most importantly the board has been able to maintain or keep its macro prudential hat on In the relevant decision-making Maintaining the macro prudential approach has been supported by comprehensive risk analysis and policy analysis on and focus on systemic issues Third turning to a specific example of taking a decision on macro prudential action I would like to bring up the Finnish case of setting the systemic risk buffer requirement first time considered in 2018 a common 1% buffer was set for the whole banking sector and Hire buffers for three largest credit institutions The Finnish financial system faces a number of structural systemic vulnerabilities most important ones are the high household in-depthness and large Concentrated and interconnected banking sector Against this backdrop. It was not a surprise that the systemic risk buffer was found necessary Also the legal conditions for setting the buffer setting the requirement were clearly met The question we really faced was whether the systemic risk buffer should target all banks or only those banks Which with largest contribution to systemic risks? Our answer was that systemic risk buffer should be imposed to all banks. Why? Simply because the underlying analysis Suggested that the whole banking sector may be exposed to structural risks and needs to be protected by capital buffers However, as the systemically imported banks still contribute more to the structural risks We found it justified to impose a larger systemic risk buffer on them also to prevent amplification of risks if you allow me to use a very simple Method for I would say that it's like having a flawed in your basement It doesn't matter if you are big or small you need to have rubber boots Otherwise your feet will get wet and naturally some do need larger boots than others As another example of macro potential policymaking based on system level view I could mention to use of the article CRR article 458 Which was used to set the floor for average Residential real estate risk weights for the credit institutions using the IRB approach The underlying problem was that the average RRE risk weights in Finland were low Of course the low IRR IRB risk weights Reflected the sound credit histories of Finnish banks and were rational from single banks viewpoint But on the same time they were very low from the systemic risk perspective The risk weights didn't adequately cover the RRE related systemic risks Which in the case of Finland are correlated These systemic risks relate to the high level of household indebtedness and its potential negative impact to overall consumption and overall economy as Well as banks large exposure towards the real estate sector and voodal abilities Connected to real estate sector in their funding structure The main purpose of the decision was to make sure that banks would have sufficient Additional capital to cover housing loan losses in severe and systemic financial crisis So the justification for taking this measure was very much systemic and macro potential as it always should be In case of CRR article 458 actions Our main takeaway from these two article 458 Processes has been That you have to do your homework properly a profound and comprehensive analysis is a precondition for a successful application process Also according to my experience open dialogue with relevant EU authorities has been essential Fourth a recurring question in the macro potential policy is a timing of policy action The question is most pressing in the case of addressing cyclical cyclical risks We choose like counter cyclical capital buffer the counter cyclical buffer should be introduced early enough To improve banks resilience before the turn of the cycle at the same time The decision maker has to take into into account the cost to the banks of adjusting their buffers While the analytical tools to inform a macro potential policy have developed a lot It seems that we might not be fully ready yet to conduct policy foreseeing that the developments in the credit cycle There is always a lot of inherent uncertainty involved in our early warning indicators So we should perhaps give more thoughts on the option of having a positive buffer requirement Even a neutral phases of the credit cycle This would help the policy makers to be ready and to react in cyclical downturns Unnecessary adjusting costs to the banks should of course be avoided when introducing the buffer Finally a couple of points on the needs needs to develop macro potential policy for the future Until now our experience on macro potential policy is purely related to the banking system The present and upcoming transformation of the financial system may however be surprisingly fast With a possibly large impact on both financial cycles and structures The European macro potential policy framework should be adapted to this change To be efficient and effective enough and to ensure a level playing field for the different actors in the financial sector Macro potential policy should become more borough based and activity based Instead of focusing on certain types of institutions This change needs actions both at the EU and at national levels In this respect the recommendation given to Finland by the ESRB published on Monday the 23rd of September Was both timely and a step towards the right direction The core of the recommendation was to enable the use of borough based tools in Finland The important part of the recommendation was that these tools should be applicable to a wide range of loans And to a wide range of lenders Defining it this way it would be possible to enlarge the coverage of the policies also to non-bank actors Non-bank lenders as their share of total lending may be growing in the future due to digitization among other things It is of the utmost importance that the changes in the policy framework are forward looking They must not be designed only to be optimal in the current framework But they need to work also in the future Policy impact assessments are important and they should better reflect the change towards non-banking in the financial system And macro potential policy Macro potential policy communication could also benefit more from impact assessments and focus on explaining various effects of policy actions The communication should cover both the overall policy objectives and the impact of policy measures on people's everyday life This type of transparency would also contribute to the accountability and help the general public to understand and accept the policy measures taken Let me stop here. Thank you Thank you very much Mardjan, now we have Ratna Good morning everyone Let me thank the organizers. It's a real pleasure to be here And I have to say that this conference is extremely well organized It was very easy to find where to go, what to do And since I bring international experiences, you will see I can definitely say that the logistics have been great So in contrast to my previous two speakers What I will do is what the IMF does best, which is give you a cross country perspective Of what we are seeing around the world So I'll present some facts on macro potential measures around the world Then I'll talk a little bit about the kind of research and the findings at the IMF And we've done quite a bit And then I'll talk about a recent initiative in the IMF called the integrated policy framework That some of you may have heard about, not heard about, but I'll introduce this Because it is relevant for macro potential policies So when you look at countries around the world What we found was that the total number of tools that were used were almost 1600 And the average number of tools used around these countries were a little over 10 And then when you look at the types of tools, you know, surprisingly at least for us We found that liquidity and foreign exchange management tools were the most popular We had expected household sector tools to be most popular But actually they were the liquidity and FX tools And this is mostly related to emerging markets And it's mainly to limit FX mismatches in those countries When you look at household sector tools, they are common across both advanced economies As well as emerging markets And then, of course, there are other tools like was mentioned previously The counter-secret capital buffers, the capital conservation buffer And also liquidity ratio caps So there are other tools that are also being used But then when you look just within the household sector tools Which is very much relevant in this part of the world There too we find that there's a variety of tools that are being used within the household sector And as you would expect, the loan to value ratio is very popular But so is the debt service to income ratio But then again, the tools are not just limited to those tools There are a whole host of other tools You know, countries have been pretty creative in terms of how to limit the risks in the household sector But the bottom line that I want to tell you is Even within a country, they are using a portfolio approach Meaning they are combining tools Since so much has been talked about the CCYB Let me just say from an international perspective So what we found was around the world And our sample has like a little over 150 countries That we have good data on 73 jurisdictions actually say that they have a framework So a framework exists for CCYB But only some have activated it So about 11 countries have already activated it And 4 are planning to activate it next year But what is really interesting is All the countries that have activated it Or are planning to activate, they are all in Europe With the exception of one country, which is Hong Kong So for whatever reason, it's not one of the most popular measures Even though in many countries you do see an upcycle The financial cycle So let me talk a little bit about the research that we have done And I'll focus on three papers or types of research And I'll give you the bottom line So some set of papers look at whether macro potential policies Are effective in small open economies And what we find is that they do have a pretty strong Effect on domestic credit And this is particularly true when the Raspillo was coming from abroad Where the exchange rate might appreciate And that has balance sheet effects, positive balance sheet effects Where the balance sheets become stronger of either the corporates Or the local banks that may be borrowing abroad And that can lead to an increase in credit growth in the economy And if you have macro potential measures, these can be mitigated by borrower based tools And since I do have my co-author here, Steve Chigeti I should mention the research that we have done together Which also looks at, actually it looks at the spillovers that are coming from prolonged Monetary policy in advanced economies, in particular the US And how it does lead to steady build up of leverage in financial firms in other parts of the world A second type of research looks at what happens when there are easy financial conditions And as the GFSR that we produce has emphasized that in the short run of course GDP can increase But in the medium run the risk of a downturn also increases as financial conditions ease today And there again what we find is that macro potential measures today can mitigate this trade-off Of reducing the downside risk tomorrow But of course it's very hard from the policy makers perspective Because the costs have to be paid today to ensure that your GDP is not at risk tomorrow And the third type of research is actually quantifying the effect of macro potential policies So let me spend a little bit of time on this chart And here on the left hand bar what we are trying to do is to look at both the benefits of macro potential policy today But also the costs and what we find is that if you tighten the LTV by one percentage point You are able to reduce credit growth by 0.65 percentage points which is quite high So it has a 65% impact So then the question is does it also affect GDP or consumption And if you think about welfare being measured by consumption today What we find is that yes it does affect consumption But it's not that high only one percentage point increase in LTV reduces consumption point by 0.15 So the bottom line is that the LTV tightening is effective in reducing household credit growth But it's also efficient because the side effects on consumption are low And then if you look at the chart on the right hand panel You see two sets of bars the green bars are on the impact on credit growth And the gray bars of course are on consumption So there the main point we wanted to show is it does matter where you start In terms of the level of the loan to value ratio So what I mean by that is if your loan to value ratio is 100 and you go to 90 The impact is very different if you are at 60 and then go to 50 So the left hand panel shows that if you are reasonably loose So your closer to 100 let's say then the impact is much higher You're able to reduce credit growth to households much more And your costs in terms of consumption are also lower Than if you're already very tight and you're trying to make it even more tight Then the gains are much less Why is that you know you can hypothesize many many many things One of the explanations that the authors provide is that if you're already very tight And you impose even tighter constraints on households Then they really have to dip into savings to provide additional down payment And that might then reduce consumption which is the extreme right hand panel Now let me turn to some new work that we are doing and we are all very excited about it So let me tell you a little bit of what IMF's integrated policy framework is And you'll hear more about it when you come to the IMF at the meetings You heard a little bit at the last annual meetings So this is an approach whereby we are conducting case studies We are conducting theoretical conceptual framework and of course a lot of cross country empirical work And why are we doing that? Because we think about macro pru as part of a comprehensive measure to address both financial stability as well as growth objectives of the authorities And so we want to look at to do a systematic approach where we want to think about macro pru as part of a policy mix And so what is the policy mix that we are thinking about? We are thinking about monetary policy, macro prudential policy Capital flow management as well as of course foreign exchange interventions that you see actually in a lot of emerging markets But some advanced economies too The idea there is that is a recognition that over time there are increasing spillovers from other countries and also greater macro financial linkages And we want to be able to model that both theoretically and empirically And we also at the same time want to recognize that different countries have different policy frameworks and they have different characteristics So for example starting point in terms of household debt or corporate debt levels as a share of GDP So the question then is how do you know shocks and country characteristics, how they might influence both outcomes directly or through policy responses And I just want to give you one illustration and this is a paper that we are working on And it's a project that I'm directly involved in which takes the idea of GDP at risk but applies to the capital flows So the top panel looks at the whole distribution of capital flows at any point in time So capital flows can you know the average capital flow is the peak as you can see But there's a whole distribution around it which tells you what is the probability of an outflow or an inflow So the outflow would be on the left hand side and the inflow would be on the right hand side So the question is if there is a negative shock how does this distribution change tomorrow And in a stylized situation we show you in the top panel that if there's a negative shock the whole distribution might shift to the left Meaning that the median inflows can reduce and the probability of outflows will increase and the inflows will decrease But then the key question we want to ask in the lower hand panel is ok given that conditional on that shock Are there certain policies that you can impose today so that you can actually reduce the probability of outflows tomorrow Or increase the probability of higher inflows tomorrow So what are the actions you can take today to shift a little bit at least the whole distribution towards the original position after a negative shock And there I just want to show you we've got many many results very exciting results but I just want to show you one So this is a chart that tells you what the distribution looks like and this is our empirical finding What the distribution looks like when financial markets are deep which is the blue line And the financial markets are shallow which is the red distribution and this is all conditional on shocks And the bottom line is what we find is that financial markets are deep then in the future you should expect higher on average inflows And you're also able to mitigate the outflows and maintain a higher level of inflows And so this is my concluding chart which what are the tentative lessons A we find macro potential policies are effective especially the borrow based tools But we also argue for a portfolio approach meaning combining policies We do believe macro potential policies can increase the resilience of the financial system based on cross-country work And also can reduce the GDP at risk that may come about because of easy financial conditions today And finally we strongly believe that macro potential policies should be looked at in the context of other policies to Thank you let me stop there Thank you very much So thank you very much for giving me the opportunity to speak in this great panel Thanks to the other speakers for their interesting inputs So as an academic I try to be a bit provocative as you can see already from the title But you shouldn't read this as a statement that I do not believe in macro potential policy So actually I believe that this paradigm shift that we've seen in banking regulation after the financial crisis was extremely important And it was basically I mean it was a response to the crisis where we learned that it's actually not sufficient to ensure that every single institution is safe in order to get a safe overall financial system And so I think this shift of perspective from the individual institutions to the system as a whole was crucial Because it takes into account the macroeconomic repercussions from individual behavior which is likely to be correlated across institutions So in practice this meant that we introduced additional regulatory instruments on top of the existing micro potential framework And these instruments addressed both the cross-sectional and the cyclical dimensions of systemic risk We also introduced a new supervisory structure on top of the existing micro potential structure And this included new authorities both at the national and at the super national level So I would like to focus my remarks on five main issues So the first is the question how we can operationalize systemic risk The second is the issue of complexity of regulation, the illusion of control The third that was already mentioned is inaction bias Then the relationship with monetary policy and last but not least the question of leakages and regulatory arbitrage So the first issue is how can we actually operationalize systemic risk So I think we have reasonably good understanding, theoretical understanding of systemic risk But we basically do not know how to translate these theoretical concepts into operational measures Of course a lot of work has been done, there are quite a few measures that are very popular So for example in the graphs you see the delta COVA, the delta conditional value at risk You see the marginal expected shortfall And so one problem with these measures is that we see that in the middle of the crisis these measures do go up Which is already good But they are relatively low at the time when the risks are building up And so this is of course a problem if these measures are to be used in macro-pudential policy Of course this is partly also related to the lack of granular data which Francesco also mentioned in his introduction But I think this is not the whole story So maybe it's not just a matter of data and maybe we shouldn't fool ourselves that we will ever get to a situation Where we just have a measure that tells us whether there are risks or not And I think one of the reasons is that actually the sources of systemic risk may change over time And also the narratives may change over time And therefore I think we shouldn't just rely on these type of quantitative measures But as for example Bob Schiller has argued, I think we also need something like narrative approaches So we basically have to understand the stories behind the build-up of systemic risk I think this is actually very important And if you have too many quantitative measures, maybe you lose sight of the overall story that is behind what we see The second issue is complexity And as you hopefully know, the advisory scientific committee recently published a report on regulatory complexity and the quest for robust regulation And we have to be aware of the fact that the macroprudential regulation of course has added another layer of complexity to the existing regulatory framework And also of the supervisory architecture And in the report we argue that excessive complexity may raise a systemic risk And so one problem is that it's actually related to the first point I made It may create the illusion that you have a very well controlled system While at the same time it gives rise to incentives to gain the system There's a danger that you miss the unknown contingencies, the unknown unknowns And also we have, I mean the whole regulatory approach very much followed what we call in the report a friction by friction approach So we have added more and more instruments And we are not very well aware how these various instruments actually interact And then of course an issue that came up in several presentations There may be incentives to shift risk out of the strongly regulated part of the financial system into less regulated areas The third important issue is inaction bias And this problem mostly refers to the cyclical macroprudential tools And there are quite a few arguments why the activation of such tools may be delayed So the first is that we are not very good in identifying the financial cycle in real time So we don't really know how large the risks actually are There are important political factors There is a recent very nice paper which shows that there are electoral cycles in macroprudential tools There is a lot of influence by lobbyists And actually the microprudential supervisors may be reluctant to tighten regulation in good times Because what they see is of course that the institution is in pretty good shape So the question is why should we actually tighten regulation in the good times Then in the Euro area the SSM also can impose a top-up on what is done at a national level And again there may be a reluctance to do so In addition there are further decision and implementation legs So overall it's very likely that the activation of these cyclical tools is delayed And I think a very good example is the counter cyclical capital buffer And this is partly related to the way that it was constructed I mean there was this idea of a guided discretion And there the credit to GDP gap was supposed to play a very strong role And as Klasit mentioned already this indicator simply doesn't work very well I mean in Germany at the time before the global financial crisis you saw nothing Now you also see nothing, it's very hard to activate a buffer on the basis of the credit to GDP gap But given that this indicator has such a big prominence in the framework Of course it's used for example by the regulated entities as an argument against activating the buffer And I mean I've seen this discussion in Germany very closely And I've seen how difficult it was to activate the buffer So now in June the decision was taken that the buffer is to be raised to 0.25%, not a lot It starts only next year in July and you know in Germany we are talking about a recession So this doesn't sound like the perfect timing after all right I mean it's good I was always very happy that the decision was taken But nevertheless I mean the idea was that if there is a recession that there is a lot of scope to release the buffer And in the end maybe we only have to 0.25% which is too little And so regarding the counter cyclical instruments I think we have to rethink the framework We may need more automaticity in the build up of the capital buffers I do think we need a positive normal level of the CCYB The fourth topic is the relationship with monetary policy And I mean I guess you're all following the press conference after the monetary policy decisions And there's always a similar statement when it comes to the side effects of monetary policy Namely that the answer is not to change monetary policy but rather to implement a specific macro-pudential policies And the question then of course is whether macro-pudential policy is actually strong enough to counter a monetary policy That encourages higher bank lending and higher risk taking And I must say I have my doubts for many reasons In the euro area specifically I think there is an institutional impediment I mean the SSM could play a very important role To top up the national macro-pudential measures So especially if there is something like a political opposition The SSM could say well but there are good reasons to do it And so I mean maybe they don't impose the top up but they talk behind the scenes to the authorities But the problem is that in the ECB's mandate there is a clear priority of price stability over financial stability So if the two are not in line which I think in certain situations is plausible It's very clear that the priority will be given to price stability And then maybe it's not so easy for the SSM to actually do the top up Finally the topic leakage and regulatory arbitrage We've also heard a bit about that already We know due to the close interconnections of different sectors in the financial system Across national borders we have a lot of cross border and cross sectoral spillovers These may give rise to additional risks and they may also affect the effectiveness of the macro-pudential tools And I think we need much more work on this There is the idea that given the cross border spillovers We may need more international cooperation in macro-pudential policies There is this instrument of reciprocity which seems to be a useful tool So that already exists for some instruments When it comes to the cross sectoral spillovers there is clearly the need for macro-pudential policy beyond banking The question is what that implies Many people say we need to shift towards a more activity based regulation Of course that is not obvious after all And a class has alluded to that Because the same activity conducted by different institutions does not necessarily pose the same risk You were talking about the duration risk and so it's not clear at all That the same activity should be regulated in the same way if it's done by different institutions And then of course I was warning against the risk from more and more increasing complexity And there is a danger that this further increases the regulatory complexity So let me conclude I believe this paradigm shift towards a macro-pudential perspective is extremely important But there are indications that the framework is getting too complex Creating this illusion of control which may be even more dangerous than in micro-pudential regulation We should be careful not to rely on excessive fine-tuning but should try to design instruments that are robust And we may need to think more about narratives in order to discover the build-up of systemic risk Even if it does not show up in our quantitative measures We have to deal with the inaction bias because this severely limits the effectiveness of the cyclical tools And may even turn them around and make them pro-cyclical So I think this will be crucial And we also shouldn't overburden macro-pudential policy Overall I think it cannot win the fight against monetary policy I think it will be weaker The question is what that implies for monetary policy Maybe we have to think about the question whether monetary policy has to take into account financial stability to a greater extent than it does so far I'm not talking about changing the mandate But nevertheless this is something to be discussed maybe not in this panel And then of course there is the need for international cooperation and for macro-pudential policies beyond banking Thank you very much for your attention I'm looking forward to the discussion And applause to the four panelists Well now I think that we have 20 minutes left for questions, debates, etc. etc. I think that in a lot of issues have been raised We had two interventions that were mainly focused on the experience of Finland and Netherlands The other two were much more cross-border And before giving the floor to the audience Because I suppose that there are a lot of issues and a lot of questions that are going to be posed You know I would like to make, you know, to ask a question to the panelists About something that you know I think that especially has been indicated and pointed out by Savelis You know the timing of macro-pudential policy taking consideration You know the present juncture that we are living now in mail in Europe But perhaps you know also in the global economy Do you think that you know the times that we are living are the correct ones In terms of you know starting to implement macro-pudential instruments Do you think that with the slowdown of the economy in Europe at the global level Do you think that we should continue paying a lot of attention to macro-pudential Or perhaps you know with this you know a slowdown of the economy Perhaps other kind of measures and policies should be used Well I mean I would subscribe I think to what also Isabel implied That we are already late if not too late And the reason of course is for that is simple you see it everywhere The political cycle is simply not synchronized with the economic cycle And politicians will never solve a problem that they don't have So politicians will only start focus on when they see the problem in their face And that is the moment when it's usually too late So suggesting that there is a choice actually to activate these policies At the optimal point in the cycle I think is not really how in real life the choice is The choice is to either implement them at the wrong point of the cycle or not implement them And that's a much tougher choice than if you had the choice to implement them at the right time Or implement them at the wrong time then obviously you would choose to implement it at the right time But that's usually an option that is not available clearly not for those instruments For which you're not in charge yourself as a macro or microprudential authority So this is a fact of life that we will have to live with And therefore the choice is not so much should we not activate macroprudential policies now Since we should have activated them a few years ago But should we not activate them now in the knowledge that then we will probably not activate them at all And being faced with that choice I would still go on activating them Acknowledging that timing is less than optimal So your point is better late than never It's quite clear So from our perspective actually it's not too late Because what we are seeing is pretty easy financial conditions And one of the results that we do find pretty strongly is that there is a trade-off It's easy financial conditions today There is a risk to growth tomorrow That it's going to be lower And so it makes perfect sense From our perspective to implement those tools today Because you want to reduce the risk to growth tomorrow Even if growth is going to be lower tomorrow for other factors At least it's not going to be that much lower Because financial conditions were easy today So we think it's going to improve the trade-off If you do implement them today Yes, thank you. I think that we have to rethink not only the use of counter-cyclical buffer Or cyclical buffers and tools But also rethink the process Because I think that there is kind of inherent delay in the process The data we are using to produce the analysis It's always historic data, it's not up to date The process takes time to make the decision In the decision making body it takes time So there are lots of risks and then it takes 12 months At least in Finland to implement to get it into force So in that sense I think that there is a risk that we will be late Or the timing is not optimal So I think that it's not only about the question of a financial cycle I think that we have to take into consideration also the economic cycle So in that sense I think that to rethink the use of cyclical buffers Is very essential But I have to mention that this morning at the Finnish FSA board We made a decision at 7.30 this morning in the telephone conference To maintain the counter-cyclical buffer at zero And the arguments were of course the same as they have been But we are in the board of the Finnish FSA Which is the macro-prudential decision maker We are now considering whether we should get the counter-cyclical buffer positive In a more neutral phase But I think that now taking into consideration the outlook of the economy I think that we should maybe rethink now and then act when we are ready with our thinking So I think the political forces are very strong As many of you also mentioned And of course other than monetary policy Macro-prudential policy is not independent And there are good reasons for that Why it's not independent And I mean we heard for example the borough-based instruments Are in many empirical papers the most effective But of course they are also the most controversial Because you are telling people that they cannot buy a house Right? And this is of course extremely difficult And I think we have to acknowledge that there are I mean certain limits of what we can do And we have to understand that we are likely to be late So the question then is what we can do about it I mean of course there are some institutional things that we can do So what matters for example is the I mean who activates the tools Of course it's important Is it politicians or is it the financial stability committee Who is in the financial stability committee Are there for example external experts or not You mentioned there are two in Finland In Germany there is no external expert I think it's useful to have external experts Because they have a different outside view And there are certain things that we can do But there are limits I think that the question of borough-based tools Is something that I think is controversial Is very effective But on the other side you are limiting the personal freedom Of the citizens That's something that in a democratic nation I suppose that the Laidimacy is something that is quite relevant So I think that we need to have a balanced approach Good spectrum of borough-based In the case of capital-based measures Well we are talking about the banks So it's a different in terms of political implications For sure that is totally different And finally before giving the floor to the audience Well what about asset management And the possibility of starting to activate Macropodational policies In the area in the space of asset management Because the importance and the size of asset management Is clearly on the rise And I think that the threats, the risks that they are putting In terms of financial stability Are much more evident and much more tangible than in the past So do you have any view on that? Yeah I think that view is not necessarily related to the housing market Because we don't have any sort of indications That they are sort of playing a specific role on the Dutch housing market But more in general if you look at the liquidity mismatches That are increasingly there In the management industry Where they are moving up the risk and illiquidity curve But at the same time offering still the illusion of daily redemptions I think that is in and of itself a reason to be prudent And to think about measures that can actually mitigate that risk Now to the credit of the securities regulatory community I mean IOSCO is working on such measures But it arranged to be seen whether they will be sufficiently effective In the FSB context we are doing two-yearly sort of liquidity stress simulation exercises Where we do involve also the asset management industry And it helps actually uncovering some of the myths that are trying to be sold About catching a falling knife and being sort of the liquidity provider of last resort Which clearly they are not when being queried and when being investigated So we have it on our radar screen and I think it is a necessity Particularly if these liquidity mismatches continue to grow I basically agree with Klaus very much And I just want to say that it's needed to prevent leakages and regulatory arbitrage Especially since that sector is becoming bigger in data Marja Yes I think that as you mentioned in your opening remarks You said that macro potential policies are new science so to say So I think that we have to go beyond adding capital requirements on banks But of course when expanding macro pool measures and macro pool tools I think we have to do it based on very profound analysis and assessment Yes so again I also agree with what Klaus has said I do see especially the liquidity issue very clearly And I mean the question is where in the end comes the systemic risk from And I think we should also be aware that many asset managers are actually also closely related to the banking sector So these are not separate worlds but they are closely related And I also think that it seems that now many people think that households should invest very strongly For example in ETFs we are basically pushing them very strongly into ETFs So the ASC had a nice report on this recently Also ETFs are not risk free And there are also systemic issues which we should discuss And so I think this is a crucial area Okay I think that we have 10 minutes left Luigi Thank you You seem to conclude at some point that there was a consensus on the panel that it's better later than ever I'm a bit uneasy with this conclusion because I think that there should be further elaboration on that The problem is I think that the label macro prudential covers very different things In certain cases for instance when there is an obvious overheating of certain specific markets like the housing market I think it was very eloquent, the presentation by Klaus was very eloquent on that In that case one might argue that if the tools were at their disposal One could have acted before but if that was not done then it's better later than ever When there is a clear overheating of a specific market excessive indebtedness excessive too risky borrower parameters etc etc But that's one thing, it's not the only type of macro prudential things that macro prudential tools that we might have Another very important aspect of the macro prudential framework is the counter cyclical issue That's extremely important because I agree with what Isabel Schnabel said at the beginning It's important to go beyond the micro aspect of supervision and go to the macro or interaction at the macro level The aspect of interaction at the macro level But then if you look at the cycle then timing is of the essence And in this case from this point of view if you act at the wrong time you clearly risk to be counterproductive I'm not sure that if you tighten credit conditions in the middle of the recession because you are acting late It is not obvious to me that it is better late than never So I think in this case having a, I mean again Isabel Schnabel seemed to be very skeptical about the credit to GDP ratio Then there might be other, of course no indicators perfect, I'm a bit less skeptical on that frankly But there may be other indicators that may be better ways of judging where you are in the credit cycle But then acting at the right time is essential You might argue that you need to have a positive counter cyclical buffer in a neutral position That might be fine but when you are there then if you tighten conditions at the wrong time that is not better than never It is worse Now that's a very good point because I think that the course thing that might happen to macro potential could be to be pro cyclical at the end of the day That could be a sort of contradiction All the panelists mentioned the political pressure But I'm asking myself if this is the case and political pressure is also a monetary policy So it's not only macro potential policy but then let's formulate better the mandate Presumably there is a mandate for the macro potential regulators So if the mandate is not clearly formulated of course there is going to be political pressure But certainly there should not be automaticity in a recession it doesn't make sense to do it I mean you have to have a holistic approach And secondly when you said Professor Schnabel you said okay let's manage a policy focus more on financial I fully agree with you But in a nutshell how would you do it And then the bottom line is that we have an abnormal financial cycle It is something to use macro potential policies when you have let's say a regular and ordinary financial cycle as the BIS says And when you have a much longer financial cycle because of very lax monetary policies which are undertaken because of the fear Or a secular stagnation because of the fear of a new downturn so we are kicking the can down the road So it's a different ball game I mean what kind of macro potential policy should be undertaken under normal circumstances And what kind of macro potential policy should be undertaken when you have a much longer financial cycle It's an abnormal financial cycle I don't know if Sabal if you want to reply to the comment do you have any Yes so I mean regarding the mandate I think it's I mean that's not easy right Because we I mean you can write many things in the mandate but you have to operationalize it And given that it's so hard to operationalize it it's I mean it's very hard to improve the situation with use of the political pressure But you have to remember that macro potential policy is not independent and it's probably not supposed to be independent And therefore it will always there will always be and no matter what the mandate is will always be more political So I think that's that's important the question how to take into account financial stability That's of course a very very difficult question I think it's largely a question of how much weight do you give to financial stability concerns in the decisions And so at the moment my feeling is that they receive a relatively low weight because this is delegated to the macro potential authorities And I think that is not a good idea because that may lead to a situation where then Where then there are two little emphasis is put on on financial stability and so then actually the risk may be higher than they should be So we have time for the last question comment, conservation Thank you have observation on the relationship between monetary policy and macro potential policy First does monetary policy have a macro potential role? Answer obviously yes Cutting the deposit rate to minus 50 bps in the resumption of asset purchases Adds to financial market dysfunctionality, reach for yield, so immediate interaction there Second macro potential measures will impact price stability through their impact on real activity We've just seen these real effects of macro potential And finally I think it's clear you can't have price stability without financial stability So in some sense the notion that financial stability is subordinate in the ECB's mandate I think based on misunderstanding Well what I have to say is that you know macro potential policy is in the mandate not of the SSM in the mandate of the governing council So we have the possibility of topping up the decisions taken by national macro potential authorities Well I think that we have come to an end Thank you very much, I think that it has been extremely interesting, extremely rich And you know that's good for applause again for our panelists