As we reach the end of this Conference, I would like to spend the next few minutes highlighting some takeaways that can be drawn from the fantastic group of speakers we’ve had today.

I will also try to share a personal perspective in relation to each of the main takeaways not just about macroprudential and financial stability but also about other topics that either are related or have an impact on them.

Let me start by thanking the speakers for sharing their ideas with us and the effective contributions of their work.

The presentations we witnessed allowed us to promote very interesting and stimulating discussions.

This thank-you note, is also extended to all the other participants in this conference.

They contributed to make it a success, by bringing out very important issues for financial stability and macroprudential policy.

The four takeaways I’ve selected are far from comprehensive, and they should be seen as an “appetiser”, since the “main course” is the reflection that should be made based on what we’ve learned and on what we would like to prioritise going forward.

The first takeaway is related to macroprudential policy impacts and the economy’s cyclical position.

If we were to rebrand “macroprudencial policy” with a different name, one of the alternatives to consider would probably be “on the job training”. The reason to perform such a rebrand, is not because we are tired of listening to an expression that has been used too many times already. It is rather because, over recent years, macroprudential policy has been gradually implemented and consolidated across different jurisdictions and in spite of the still short period that has passed since the global financial crisis, the economic environment and the financial system have changed substantially in many European countries, albeit at differing paces.

I’ve used the expression “short period” but I’m aware that it probably seemed like an eternity for those who were most severely hit by the crisis. 

During this short period, substantial regulation and supervision reforms have been introduced across the financial sector, most notably the establishment of the Banking Union, the implementation of recovery and resolution schemes for credit institutions and the review of the regulatory framework governing the banking system, including the quantitative and qualitative strengthening of capital requirements under the Basel III Accord.

I should have probably said the “establishment of two-thirds of the Banking Union” since “one-third”, which is a very important “third” is still and very painfully missing and this is also part of the “on the job training”, which consists of assuming we have three pillars, while in reality there are only two, but economists are masters in the art of “assumptions”, as we were told in the famous story of the “can opener”.

Macroprudential policy has been implemented within this unique context, establishing itself as an autonomous “economic policy area” interacting with other policy domains. 

Along the way, macroprudential authorities in the EU have been increasingly active in safeguarding financial stability but also facing many challenges, against the background of recovering economic activity and also significant restructuring in the banking sector.

In parallel, signs of a reversal in the financial cycle have erupted, together with the momentum in the real estate market.

The question that still remains though, taking into consideration that macroprudential policy interacts with other policy areas, is how to quantify the ultimate effects of macroprudential policy; not only the impacts on financial and credit markets, but also on economic activity.

Better understanding the transmission channels of macroprudential instruments is also of utmost importance, both to assess their impact on the financial cycle and on the real economy, as well as to evaluate the benefits and costs of adopting macroprudential measures.

Conceptually, a desired macroprudential policy is one which maximises the benefits, while minimising the costs to society, hopefully with a net positive result in the end.

The evidence shows that in the long-run, countries which make use of macroprudential tools, other things being equal, do experience stronger GDP growth and have a more reduced probability of a crisis, which leads to less volatile output growth. But in the short term, macroprudential policies might negatively impact output growth, namely by affecting credit supply, investment and even private consumption.

All these different and sometimes contradictory effects are influenced both by the openness of each economy and by its financial development, which in turn shape the capacity of targeted agents to evade and circumvent macroprudential policies, and can also lead to leakages to occurring, through the activity of non-targeted agents, either in the domestic domain or at cross-border level.

The second takeaway is about the association of macroprudential policy to the residential real estate market.

I’m not bringing this takeaway because of the number of times we are asked, and not just by the media, whether or not we have a bubble in the Portuguese RRE market?

I’m bringing it because one of the main risks to financial stability that has led to the adoption of macroprudential measures by many countries is related to developments in the RRE sector. 

Macroprudential authorities have been paying particular attention to the dynamics of the RRE sector: the acceleration in house prices, especially over the past few years, often combined with rapid growth in loans to households and also with an increase in households’ indebtedness, are very important risk factors. 

To address these risks, many authorities have chosen to combine a number of different instruments, such as limits on the LTV ratio with limits on DSTI/DTI ratios, at times also coupled with limits on maturity or even amortisation requirements.

When we look at the international landscape to assess how different authorities have handled the practical implementation of measures, we can observe a very heterogeneous approach, be it in terms of the legal form adopted, or the policy design, or the type of exemptions considered, or even the type of “phasing-in” arrangements.

But apart from the mentioned heterogeneity, there is one totally common understanding that is shared by those same authorities. The common understanding is that the combination of different types of borrower-based measures reinforces their effectiveness and also their respective ability to achieve policy goals while doing so, at a minimum cost.

I cannot avoid this opportunity to highlight once more the borrower-based macroprudential recommendation adopted by Banco de Portugal on new mortgage and consumer loans, which also combines different instruments (LTV, DSTI and maturity limits) and we were particularly satisfied to see that due to this recommendation, the ESRB in its 23 September report, included Portugal in a minority Group, which, in this case, is also a “Very Good Minority Group”.

The ESRB concluded that in spite of the level of risk associated to the RRE market in Portugal, the macroprudential measure implemented was considered to be “fully adequate and sufficient”, to mitigate that risk.

An additional side note on this to stress that this assessment is not just something that Banco de Portugal, as the macroprudential authority feels proud of; this is also a relevant benefit for citizens, for companies, and for the Government, if we take into consideration potential impacts on financing costs resulting from a higher risk profile. 

The third takeaway has to do with issues in policies meant to address risks stemming from non-financial corporations.

Some EU Member States faced a significant increase of non-performing loans associated to non-financial corporations, either as a direct result of the crisis, or as a combination of the crisis with high levels of debt that were built up before the crisis.

The academic literature has devoted substantial attention to the assessment of debt sustainability of non-financial corporations and its macroeconomic and financial implications. 

One of the most relevant research topics in this field is the assessment of debt sustainability of non-financial corporations against the background of different economic and financial scenarios.

In order to perform the research which is necessary for this assessment, having data at the “loan level”, also known as microdata, is of paramount importance.

But in spite of the importance I’ve just mentioned, the use of macroprudential instruments targeted at the non-financial corporations’ sector is not as widespread as in the case of households.

Academic contributions are still scarce and the challenges are more significant than in the households’ sector given the intrinsic characteristics of firms.

As a consequence, this is clearly one area where further research is needed, in order to develop analytical frameworks, both for ex-ante calibration of instruments as well as for ex-post assessment of policies’ impacts.

But here, and even if microdata is critical to ensure macroprudential measures as robust as possible, I believe the situation seems so obvious that we cannot become trapped by the so-called “analysis paralysis”! 

I would dare to say that it is crucial to move from a fundamentally debt-based economy to a more capital- or more equity-based economy, particularly when we refer to the corporate world.

This is clearly a topic where the problem is known, is understood, is recognised, but then, when it comes to removing disincentives and if possible introducing incentives, things either move very slowly or do not move at all, not to mention that moving backwards is sometimes how it looks.

Nevertheless, I don’t believe that it would be adequate to put all the pressure on “policies” as they are not a perfect substitute for one key element, which is the willingness of economic agents, but again, as we all know, economic agents react and adapt to the incentives, and therefore policies should be able to provide the right incentives.

And to finalise my comments on this third takeaway, a quick remark on the CMU is also justified.

Without discarding the need for a “Capital Markets Union”, the way it will be achieved is not irrelevant to determining whether it will be capable of fulfilling its promises.

I believe it is important to stress that the very simple rule of “first things first” should apply and that rule is the equivalent of saying that before having a “Capital Markets Union” we need to have “capital markets”, in ways that allow their benefits to spread across and within different geographies instead of just promoting concentration at the centre.

History has shown us that in the past, even without a “union of capital markets” we’ve had periods in which “capital markets”, with the right incentives, played a more relevant role in financing the economy in a more balanced way, and as such, there’s no need to reinvent the wheel here.

The fourth and last takeaway I would like to mention has to do with the challenges ahead for macro-prudential policymakers.

I will briefly highlight four main challenges that are ahead of us. 

One challenge results from on one hand, the multiplicity of macroprudential policy goals and on the other hand, the relative similarity of policy instruments.

This situation creates the risk of an overload of policy measures if different sources of risk are to become targeted separately.

In order to address this risk, we need a comprehensive approach to policymaking. The development of a concept of a “stance of macroprudential policy” to guide policy decisions would also be very helpful. 

The work that the ESRB has been undertaking in this field, part of which has been recently published, is very welcome.

Another challenge results from the heterogeneity of macroprudential policy at international level.

This may be a consequence of the specific characteristics of each Member State, or of its position in the financial cycle or even of different preferences of national macroprudential authorities.

A third challenge is the result of our still very modest experience in the use of macroprudential instruments and consequently, the high uncertainty that surrounds their expected effects. So far, the considerations on the interaction between different macroprudential instruments are mostly based on a conceptual framework of how macroprudential policy is expected to operate. 

The fourth and final challenge I would like to mention addresses the optimal choice of macroprudential instruments and the fact that such a choice seems to be related to the phase of the financial cycle and to its relationship with real estate market developments, which often have been at the core of past financial crises. 

In an ideal world, the comparison with the appropriate counterfactual would be the best methodological approach to take, but unfortunately, that is not always available. 

We also know that further assessing the macroprudential policy’s ability to mitigate systemic risk will only be possible when a full financial cycle has been completed.

But even if we do not live in the ideal world and we do not have a full completion of an entire financial cycle, there are important takeaways when it comes to the “optimal choice of macroprudential instruments”:

Be it the answers we do know already with a reasonable degree of certainty, be it the questions we know we need to raise before taking action.

Starting with the things we do already know with a reasonable degree of certainty, an important one is that in periods where the financial cycle enters an expansionary phase, it seems more appropriate to adopt measures that impact on credit flows, such as borrower-based measures, and at subsequent stages when there are signs that the financial cycle is in a more mature expansionary phase, activating cyclical capital-based measures may be the most appropriate policy response.

For the questions we know we need to raise before taking action, the list is already quite comprehensive. A few examples of such questions could be: Should the instrument be designed as a rule or should the macroprudential authority act in a discretionary manner? Should the macroprudential authority start by adopting a binding measure or opt instead for a non-binding one and monitor the degree of compliance and effectiveness? What is the best alternative to mitigate the risk of inaction bias?

All this of course allows us to say that the current environment clearly tests the capacity of macroprudential policymakers to mitigate systemic risks and also tests the capacity of research to correctly identify them and assess the impact of policy measures. 

We are still far from the point where the “known knowns” are predominant in comparison to the “known unknowns” not to mention the “unknown unknowns” which stubbornly tend to reveal themselves in a totally impolite and unexpected way. As such, it is of utmost importance to continue this discussion with all macroprudential stakeholders and promote further research on policy issues in this field.

After everything I’ve just said, there is however a missing component, which If I didn’t mention it could be perceived as missing the elephant in the room, but I’ve deliberately skipped it, because it is such a relevant topic that trying to address it at this point would be merely superficial and detrimental to the centre stage it deserves.

I’m talking of course about the “financial stability” threat deriving from “climate change” and “energy transition”, and also the challenge that it poses to “macroprudential authorities”. 

I just would like to add that we are dedicating serious attention to this topic and when we feel the time is right, more news on the topic will be made available.

Let me finish as I started, by thanking all our speakers and participants again.

A big thank you also to the entire team involved in the organisation of this Conference.

Organising a Conference such as this one is a truly joint effort involving many Departments and since it is impossible to name all those who gave their support, I would like to convey a strong word of appreciation to Anabela Marques, from the Financial Stability Department and through her, to all those that made this Conference possible.

For all those who have attended this Conference, I look forward to seeing you all next time.

And for those who are travelling back home, I wish you all a safe journey.

Good bye and thank you.