The Eurosystem, the euro area and financial stability

In the euro area, responsibility incumbent upon central banks in terms of financial stability is mainly exercised at the national level. Indeed, it would have only been justified to assign the European Central Bank (ECB) a key role in the maintenance of financial stability if the creation of the euro area was likely to increase systemic risk. In fact, the setting up of Target, with the granting of fully collateralised intraday credits in the real-time gross settlement systems operated by central banks, has led to a reduction in systemic risk. Furthermore, several factors, either of a macroeconomic nature (the single monetary policy, the disappearance of exchange-rate crises and improved fiscal discipline), or a technical nature (increased liquidity and the replacement of unsecured loans by repos) have come together to strengthen financial market stability. Lastly, in the banking sector, credit institutions have capitalised on several years of robust economic growth to increase their financial soundness. Banking mergers have generally taken place at the national level and cross-border lending has remained meagre, limiting risks of contagion in the euro area as a whole. In any case, the Eurosystem has ways of preventing and efficiently managing systemic crisis, should it arise. Target is protected against the risk of “seizing up” thanks to broad eligible collateral requirements, and against the risk of intraday credit payment default — notably by participants from “pre-in” countries — thanks to dissuasive measures. The Eurosystem constantly monitors financial markets and, as it demonstrated in the wake of the events of the September 2001, has efficient and rapid means of assuaging the market pressures that could be passed on to banking liquidity, the only type of liquidity the Eurosystem steers. In addition, as central banks pay heed to financial market distortions only because they may impair the stability of prices of goods and services and affect financial stability, it would be unwarranted for the ECB to take account of asset prices in its conduct of monetary policy. Lastly, close international co-operation between banking supervisors and the advantages inherent in combining monetary policymaking with banking supervision at the national level prove that the Eurosystem’s institutional supervisory arrangements, in which national central banks play a primary role, are appropriate. In this regard, the organisation of the provision of emergency liquidity to institutions has not changed fundamentally since the changeover to the euro, as mechanisms for the rapid transmission of information to the ECB make it possible to deal with the impact that these operations have in terms of liquidity.