We are facing a changing financial landscape, the fragilities that led to the recent crisis are not yet solved, and we now also have to deal with new challenges arising from several macroeconomic and regulatory developments that were put in practice to deal with it. 

The recent crisis left financial systems of many countries vulnerable to legacy assets, in some cases in a context of over-indebted economies. 

This vulnerability and the macroeconomic environment, characterized by very low interest rates and subdued economic growth, can significantly undermine the performance of the banking system.

As we have seen this morning (Martinho, Oliveira, et. al), adverse economic conditions and interest rate shifts explain the large drop in average bank return on assets (ROA), that we have witnessed since 2008. 

Given the persistency of some of these conditions, they are likely to continue to exert a downward pressure on banks’ profitability for some time. 

This limits the capacity of banks to increase own funds via revenue generation, putting increased pressure on other forms of capitalization, which tend to be more costly. 

In response to the crisis, the regulatory and supervisory framework has been subject to extensive reforms. 

As a result, we have now a more robust and capitalized banking sector. 

These reforms, such as the minimum requirement for own funds and eligible liabilities (MREL) and IFRS9, are still ongoing and I am convinced that, if properly implemented (and I will address this issue later on), the resilience of the financial system would be improved even further. 

However, it is important to keep in mind that these ongoing reforms put significant pressure on banks’ funding capacity, in an environment where this capacity is likely to be undermined. 

In order to achieve a successful steady state, it is important that the implementation of these reforms takes into account not only the benefits arising from higher funding requirements, but also its underlying macroeconomic costs. 

Although increasing banks’ resilience is extremely important to financial stability, we do not want to achieve the so-called “stability of the graveyard”.

The cost of raising capital standards rely, to a great extent, both on the strategies pursued by banks in order to comply with these requirements and on the phase of the business cycle in which the banks operate.

In a context where the capacity of banks to generate profits is constrained and the access to new equity is limited, the deleveraging of the banking sector seems, in some countries, the inevitable option. 

The effects of deleveraging can be more or less harmful depending on the channel through which credit is transmitted into the economy.

As pointed out (in Mian, et al, 2017), the impact of credit supply shocks, depends on whether they contribute mostly to boost demand or, if by contrast, they affect the economy primarily by loosening firms’ borrowing constraints and, consequently, improving labour productivity. 

The first scenario leads to more amplified business cycles, combined with more severe recessions, since wages fail to provide the needed adjustment, given nominal downward rigidity. 

By contrast, the latest channel of transmission leads to more benign effects on economic growth and competitiveness. 

Regulation should, therefore, take into account which channel dominates and ideally try to incentivise the most appropriate transmission of credit into the economy.

The interaction and substitutability between the regulated and non-regulated banking sector would also have to be taken into account by policy-makers. 

As pointed-out (in Martinez Miera and Repullo, 2017), an environment of low interest rates, especially when capital is scarce and costly, is particularly prone to the expansion of the shadow banking. 

In such situation, improving the resilience of regulated institutions may come at the expense of driving some financing activity outside the perimeter of regulation.

In addition, when imposing capital standards, regulators should also consider the creation of mechanisms that incentivise banks to produce unbiased risk metrics. 

As discussed (by João Santos), capital standards make reported risk costly for institutions, and this encourages them to produce downward-biased estimations. 

Therefore, the main challenge of macroprudential policy at the current juncture can be summarized in a very simple sentence to say, but a very hard goal to achieve.

“The macroprudential policy has to be capable of improving the resilience of the financial system, while allowing an adequate level of financial intermediation to sustain economic recovery”. 

As such, the implementation of macroprudential policy should consider not only the positive impact of its instruments on the mitigation of systemic risk but also the negative implications concerning their costs, and the unwanted effects and possible spillovers. 

However, there is considerably more research on analysing the impact of policy instruments in reducing the probability of a crisis than on assessing the costs or negative outcomes, resulting from their implementation. 

This can also be concluded by the presentation on the use and effectiveness of macroprudential policy (Stijn Claessens), which indicates that, the transmission mechanisms of policy instruments are not necessarily static, but rather evolving over time, with innovation, with reforms, and with the cycle of the financial system. 

The assessment of the effects I have just mentioned, should take into account the endogenous structure of the financial system and the non-linearities associated with policy effects. 

This clearly raises the boundaries of research required for risk and policy analysis 

Some of the presentations that we had today were great examples to highlight what I’ve just said (Corbae; Mendoza).

In addition (as discussed by John Fell) another important aspect to consider in policy implementation is the existent trade-offs between macroprudential policy instruments.

Many of these instruments, although designed at targeting different sources of systemic risk, will impact on many of the same objectives. 

For example, borrower-based measures like loan-to-value (LTV) or loan-to-income (LTI) caps, even though more directed at taming the financial cycle, would also contribute to increase the resilience of the banking system, namely by reducing the borrowers’ probability of default and/or the losses, should such default occur. 

Along the same line of thought, different capital-based instruments, although targeted at specific intermediate objectives, will most likely be transmitted into the economy through the same channels.

They may differ in the timing and scope of implementation, but they are essentially the same tool (i.e. capital ratios). 

The multiplicity of macroprudential policy goals and the relative similarity of policy instruments run the risk of an overload of policy measures if different sources of risk are targeted at separately. 

A global approach is needed in policymaking and the development of a concept of ‘the stance of macroprudential policy’ would be very helpful to guide policy decisions. 

I would like to add a few remarks about the challenges that we still face today, as far as promoting financial stability is concerned. 

We cannot ignore that, despite the important steps taken, the Banking Union is still incomplete. Without a proper common deposit insurance scheme and the setting up of a backstop for the Single Resolution Fund, it simply cannot work properly. 

In fact, while supervisory and resolution decisions are taken at EU-level for the most relevant institutions, financial stability is still mostly a national concern and responsibility, despite the much more limited set of tools to safeguard it, particularly in a context where there is a clear misalignment between the responsibility of financial stability and risk control. 

Furthermore, the development of the Banking Union was anchored on a steady state assumption of a sustained macroeconomic recovery, which is still far from having been achieved. 

Proof of that is the debate that we had today on how to address important crisis legacy issues for which the adequate and effective tools are not available, at least under the current EU regulatory framework. 

The imposition of blind rules that do not take into account the heterogeneity of non-performing loans (NPL) should be avoided. 

The NPL stock cannot be addressed in a way that triggers fire sales, potentially leading to a significant negative impact on the banking system and on the non-banking sectors of the economy as well. 

On the contrary, NPL should be addressed over an adequate period of time, taking into account the heterogeneity of NPL in banks’ balance sheet, in order to preserve financial stability.

Additionally, in the development of European regulatory framework, greater attention should be given to transitional aspects.

The entry into force of the Bank Recovery and Resolution Directive (BRRD) has occurred without a full recovery of the EU economies, and without banks having significantly strengthened their ability to absorb losses. 

The importance of MREL, within a harmonized bank resolution framework, is indisputable. 

It has clear benefits once the steady state situation has been achieved. 

The most important benefit is safeguarding financial stability in the long run, by promoting an orderly resolution of banks and protecting taxpayers, which contributes to mitigate the negative bank-sovereign feedback loop. 

However, in order to ensure such ultimate goal, its potential negative spillovers have to be taken into account, as they can undermine financial stability during the implementation phase, especially given the magnitude of the aggregate expected MREL shortfalls, vis-à-vis the current market capacity to absorb the necessary issuances. 

Following the crisis period, the European banking system is still on a challenging path towards a sustainable situation.

The current context is still characterized by low profitability, by high stocks of legacy assets, and also by different market access conditions.

As a consequence of such context, careful consideration must be given to the measures adopted by regulators and supervisors, whose responsibilities should be clearly distinguished, as those measures could actually create more risks for financial stability. 

The heterogeneous situation of banks across Europe cannot be neglected. 

Special attention should be paid to the specificities of each banking sector and to the impact of the supervisory and regulatory action, not only on the financial stability, but also on the overall economy. 

In particular, we should keep in mind that supervisory and regulatory measures, as well as the moment chosen for their adoption, may have significant implications on financial intermediaries and on their capacity to properly play their role in the economy. 

If those measures tend to favour the consolidation in the European banking sector, then we must take into account the potential disruptive and negative effects that such consolidation might have. 

Among such negative effects I would like to highlight two. 

One is a possible, and very likely, reduction of the services available to the business community of some member states, both in variety, in quality and in price, with this being particularly relevant for the member states which have their banks consolidated instead of being the consolidators.

Another is the fact that we cannot neglect the risks underlying too-big-to-fail institutions, which we are actually trying to mitigate in the new regulatory context, nor can we neglect the negative consequences for the economy as a whole, associated with the lack of competition across banks. 

As it has already been said many times, but apparently we still need to say it many times more, and perhaps using loudspeakers, “If a Bank is too big to fail, it is too big, period”.

The “small is beautiful” concept should probably be reinstated in the economic and financial jargon.

The current environment clearly tests both the capacity of policymakers to mitigate systemic risks and of research to correctly identify such risks and assess the impact of policy measures. 

A global perspective in analysing risks and the impact of policy instruments is essential in order to pass this test.

Let me finish as I´ve started, by thanking all who made this Conference possible and to our Speakers in particular

I hope you’ve had a fruitful time and that we can continue to meet, to discuss and to share information on topics that are key to our society as a whole.