ECB Debates Bubble-Prevention Tool It Has Little Power to Deployby and
Central bank holds its first macroprudential conference
Delegates debate best way to curb risks from monetary stimulus
The European Central Bank is preparing for the day it has to use policies over which it has incomplete control and no experience.
As they pump ever more liquidity into the euro area to revive inflation, ECB officials are watching for the build-up of any financial bubbles in parts of the economy. With monetary tightening probably too broad a step for narrow risks such as overpriced real estate, the spotlight is on more targeted instruments known as macroprudential measures.
Yet as the ECB’s first macroprudential conference showed this week, the institution doesn’t have the powers it wants, and the effectiveness of the untested instruments is disputed. Vice President Vitor Constancio reiterated his call for more authority to take steps such as capping loan-to-mortgage values -- a measure that proved effective elsewhere in reining in real-estate bubbles.
“For financial stability, there is no choice but to use macroprudential policy,” said Lars E. O. Svensson, a professor at Stockholm University who opened the two-day conference on Tuesday. “It’s an illusion to believe that monetary policy would have much of an impact.”
Svensson’s career illustrates the potential strain between monetary and macroprudential policy. In 2013, he resigned from the post of Riksbank deputy governor after a long-running disagreement about whether rates should be used to stem record house prices in Sweden.
The capability of tools such as counter-cyclical buffers and limits on home loans in preventing the kind of imbalances that sparked the global financial crisis was one of the key themes of the conference. Some scholars and policy makers argued that the instruments can have unintended consequences, or a limited effect, and that the best way to prevent a bust is to unwind stimulus as fast as economically possible.
The ECB has good reason to ponder the issue. It’s buying 80 billion euros ($90 billion) a month of public and private debt, and is lending banks cash at zero or even negative interest rates for as long as four years. Its balance sheet has expanded by almost one trillion euros since late 2014.
Yet its macroprudential powers are far from sweeping, and even those it does have haven’t been deployed.
“We have the competence of deciding if we would want to top up, to increase, to make more stringent the measures adopted by the national authorities,” Constancio said. “So far, we have not decided to top up measures adopted by national authorities."
That should not be seen as a sign of timidity, according to Sergio Nicoletti Altimari, the ECB’s director general for financial stability.
“We aim at maximum cooperation and dialog with national authorities, of course maintaining the possibility of a divergent view and a critical view,” he said on a panel on Wednesday. “Because of this we don’t expect top-up to happen frequently and in any event the frequency of top-up should not be taken as a measure of success of our policies.”
The ECB says it’s currently expanding its research on the financial cycle and on the effects of macroprudential policy. It recently published its first report on the issue and the Frankfurt conference will be repeated every year. Constancio said he wants a “lively dialog” with official institutions, the financial sector and academia. The central bank may need to go further than that.
“You can report all the financial-stability stuff you want,” said former Federal Reserve Vice Chairman Don Kohn, who is now a member of the Bank of England’s Financial Policy Committee. “But if you don’t have the power to deal with it, you can’t be held accountable. It’s just a lot of glossy pages with pretty graphs.”