Thinking about macroprudential regulation in Euroarea

Lorenzo Bini Smaghi of ECB has an interesting paperon how macroprudential regulation would work in Euroarea. He says there are 3 models:

– In Model 1, the central bank identifies systemic risks and makes recommendations to the authority in charge of micro-prudential supervision, which sets out the main actions to be taken to address these risks.

– In Model 2, the central bank is not only in charge of identifying risks, but is also able to take specific macro-prudential measures or to require the authority in charge of microprudential supervision to do so.

– In Model 3, a joint committee, composed of representatives of the central bank and the supervisory authority, makes the final decision as to the appropriate policy response.

In Euroarea’s case, Model 2 is the best according to him. ECB is best suited as However, ECB should be given two separate instruments- one for price stability and other for financial stability. It will remove the issue of having one instrument and achieving 2 objectives. Read the paper for more details.

I however think what we need is people who want to regulate. This plain organisation/reorganisation jumbo-mumbo will only work then. Otherwise it is another wastage of resources and again they will say we cried foul but no one listened.

Towards the end Smaghi says:

Some concern may arise on whether the decision-making process, in particular within Europe and even more so for the euro area, which is expected to be set up over the next few months will be effective in the context of the single financial market, also in comparison to the reforms which have been put forward in the US. Implementation will be key. Indeed, as time goes by, and financial markets show some signs of stabilisation, there is a risk that the sense of urgency for reform fades away and nationalistic tendencies and institutional jealousies re-emerge. The forces pushing towards maintaining the status quo are gaining strength. If these forces are not firmly counteracted, this crisis could turn out to have been a wasted opportunity. And the next crisis could move closer.

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