Our world is undergoing far-reaching change. Geopolitical tensions, erratic trade policy, and structural challenges like demographic change and digitalisation – all these factors are a huge challenge for the global economy and financial stability. Uncertainties are shaping today’s situation. New shocks are materialising more often, calling for a financial system that is resilient and adaptable. At the same time, it is becoming ever more important to cooperate internationally.
The challenging current environment and the 20th anniversary of our Financial Stability Review invite us to take stock of the state of play. What makes macroprudential oversight and policy so important, and why does it matter right now? To answer those questions, let’s start by looking back at the early days of macroprudential oversight and policy. The term “macroprudential policy” has been an integral part of central banks’ and supervisors’ language since at least 2007, when the global financial crisis (GFC) erupted. 1 The GFC may have originated in the United States, but it was hugely costly for taxpayers in Germany as well. 2 That is why our Financial Stability Review assesses the situation in Germany within a global context.
The GFC fundamentally changed the way we think about a secure financial system. Before that crisis, supervisors used to monitor whether banks were healthy, in and of themselves. This “microprudential” approach, as it is called, is still valid and important. But in the post-GFC world, regulators added a systemic, macroprudential perspective. Because the GFC taught us a painful lesson – that interactions within the financial system can lead to crises even if each individual actor and/or sector within that system seems to be stable, when viewed in isolation.
By reforming regulation and supervision, we have achieved a great deal internationally. We have improved the quality and quantity of the capital requirements for banks. Additional capital buffers are now in place to make banks more resilient to system-wide risks. These buffers strengthen banks’ ability to absorb losses without reducing the flow of credit to the real economy. They therefore help keep the financial system stable and the economy running. We have done the legislative groundwork for borrower-based instruments, like ceilings on the share of debt. We have introduced liquidity requirements for non-bank financial intermediaries (NBFIs) and a risk-oriented framework for insurers (Solvency II).
Global financial crisis, sovereign debt crisis – a few years have passed since then, I’m pleased to say. Why is macroprudential oversight and policy still such an important topic nowadays? Even if we haven’t been through a worldwide financial crisis for over a decade now, some episodes have put financial stability to the test: Brexit, the COVID-19 pandemic, and Russia’s war of aggression against Ukraine. The financial system managed to withstand those challenges, fortunately. More recently, there has been the banking turmoil in the United States and Switzerland in spring 2023 and the US tariff announcements on 2 April this year. What these episodes tell us is that the absence of a crisis doesn’t necessarily mean that all is calm in the financial system.
The fact that these events didn’t culminate in a crisis tells me that microprudential and macroprudential regulation put the right guardrails in place for the financial system. We’ve seen that microprudential minimum requirements and macroprudential add-ons work well side by side. Minimum requirements for capital alongside macroprudential buffers that are adjusted in response to systemic risks are a key example of this. At the same time, the absence of crises doesn’t mean that we should settle back and relax. Forward-looking policymaking that has the financial system as a whole in its sights is more important than ever, in my view.
That’s because new developments can leave the financial system more vulnerable. Just take the fallout from the climate crisis or geopolitical tensions and their impact on the financial system. Or consider, in particular, technological developments, like the interconnectedness of stablecoins with the traditional financial system, the influence of artificial intelligence and also quantum computing. The financial system needs to be robust to developments of this kind as well. That will call for intense international dialogue – today and also in the future.
Just as financial market participants adapt to new developments, so, too, does microprudential and macroprudential policy need to evolve. By introducing reforms, we have made the financial system significantly more resilient over the years, though regulation has also become more complex. The current situation invites us to reflect on which items of the regulatory regime we can adjust. We should strive for a resilient financial system that blends less complex regulation with the ability to act effectively. With this goal in mind, we can stake out a framework that is both fit for purpose and respects the interests of both market participants and regulators.
But let’s return to the present day for now. This report, the Bundesbank’s 20th Financial Stability Review, presents our view on the challenges currently facing Germany’s financial system and what we think needs to be done. Ladies and gentlemen, I wish you a pleasant read.
Michael Theurer Deutsche Bundesbank Executive Board member, responsible for the Directorates General Banking and Financial Supervision, and Financial Stability
