CONTRIBUTION THE FINANCIAL ULTRA-LOOSE ...bruegel.org/wp-content/uploads/imported/publications/pc...THE FINANCIAL STABILITY RISKS OF ULTRA-LOOSE MONETARY POLICY GRÉGORY CLAEYS AND

ISSUE 2015/03MARCH 2015 THE FINANCIAL

STABILITY RISKS OFULTRA-LOOSEMONETARY POLICY

GRÉGORY CLAEYS AND ZSOLT DARVAS

Highlights• Ultra-loose monetary policies, such as very low or even negative interest rates,

large-scale asset purchases, long-maturity lending to banks and forward guidancein central bank communication, aim to increase inflation and output, to the bene-fit of financial stability. But at the same time, these measures pose various risksand might create challenges for financial institutions.

• By assessing the theoretical literature and developments in the United States,United Kingdom and Japan, where very expansionary monetary policies wereadopted during the past six years, and by examining the euro-area situation, weconclude that the risks to financial stability of ultra-loose monetary policy in theeuro area could be low. However, vigilance is needed.

• While monetary policy should focus on its primary mandate of area-wide price sta-bility, other policies should be deployed whenever the financial cycle deviatesfrom the economic cycle or when heterogeneous financial developments in theeuro area require financial tightening in some but not all countries. These policiesinclude micro-prudential supervision, macro-prudential oversight, fiscal policy andregulation of sectors that pose risks to financial stability, such as construction.

Grégory Claeys ([email protected]) is a Research Fellow at Bruegel. ZsoltDarvas ([email protected]) is a Senior Fellow at Bruegel. The authors aregrateful to Alvaro Leandro and Thomas Walsh for excellent research assistance. ThisPolicy Contribution was prepared for the European Parliament Committee on Economicand Monetary Affairs ahead of the European Parliament’s Monetary Dialogue withEuropean Central Bank President Mario Draghi on 23 March 2015. Copyright remainswith the European Parliament at all times.

Telephone+32 2 227 4210 [email protected]

www.bruegel.org

BRU EGE LPOLICYCONTRIBUTION

THE FINANCIAL STABILITY RISKS OF ULTRA-LOOSE MONETARY POLICY

GRÉGORY CLAEYS AND ZSOLT DARVAS, MARCH 2015

02

BR U EGE LPOLICYCONTRIBUTION

EXECUTIVE SUMMARY

• Cuts that take central bank interest rates closeto or even below zero, large-scale asset pur-chases, long-maturity lending to banks and anew way of communicating intended futuremonetary policy measures (‘forward guidance’)can lead to ultra-loose monetary conditions.These measures can increase inflation andoutput, which benefit financial stability. How-ever, ultra-loose monetary policies pose certainchallenges to financial institutions and mightendanger financial stability through variouschannels.

• Ultra-loose monetary policies can support theeconomy by encouraging more risk-taking at atime when risk-taking in the financial system isless than socially desirable. However, when risktaking is excessive, ie more than what issocially desirable, it might plant the seeds offinancial instability.

• Banking indicators do not suggest substantiallyincreased risk-taking in the US, UK, Japan or theeuro area during the past six years, while bankleverage has generally declined, which shouldreduce the risks to financial stability. Bank reg-ulation, stricter supervision and market pres-sure might have played a role in limitingfinancial-sector leverage.

• While stock market indices are high throughoutthe world, simple equity valuation indicators donot suggest any obvious bubbles. Recenthouse price increases in the US and UK aremoderate compared to historical increases,even though house prices increased muchfaster in London and Washington DC. Housingprices remained almost unchanged in Japandespite massive monetary easing.

• Life insurance companies typically havelonger-maturity liabilities than assets and arethereby exposed to declines in interest rates.In the euro area, German, Austrian and Lithuan-ian life insurers are most exposed to this risk.

THE FINANCIAL STABILITY RISKS OF ULTRA-LOOSE MONETARY POLICY

Non-life insurance providers are expected toperform well in the coming years, which mightcompensate for the declining returns in lifeinsurance.

• Emerging countries might be adverselyimpacted by ultra-loose monetary policies inadvanced countries because of the conse-quent large and volatile capital flows, which inturn could have negative feedback effects onfinancial stability in advanced countries. Nev-ertheless, emerging economies continue tothrive and their outlook has not changed sub-stantially compared to the pre-crisis period.

• Ultra-loose monetary policies benefit publicdebt sustainability by reducing interest rates,increasing inflation, improving the economicoutlook and increasing central bank profits,which is positive for financial stability.

• Exit from the current mix of ‘loose’ conventionaland unconventional policies could increaseinterest rates, reduce stock, bond and housingprices, reduce risk-taking, weaken public debtsustainability and create volatility in emergingmarkets. Therefore, the end of asset purchaseprogrammes and the reversion of interest ratesto higher levels should be carefully managedat a time when the economy has strengthenedand inflation is expected to increase towardsthe central bank’s target in the medium term. Inour assessment, the Federal Reserve and theBank of England were able to conclude theirasset purchase programmes without any last-ing negative impacts on financial stability, andseem so far to be exiting smoothly from ultra-loose interest rates. In the euro area, thesmoothness of the eventual exit will likelydepend on inflationary and output develop-ments in the coming years, and on the durationof loose monetary policies.

• Price stability does not ensure financial stabil-ity. The last boom-bust cycle was very costly interms of output and unemployment in manyadvanced countries, in particular in Europe. Now

03

BR U EGE LPOLICYCONTRIBUTIONTHE FINANCIAL STABILITY RISKS OF ULTRA-LOOSE MONETARY POLICY

a broad consensus has emerged on the need toaddress financial stability issues ex ante.

• There is no consensus on the role of monetarypolicy in supporting financial stability. In ourview, monetary policy is not well suited to tamefinancial excesses when the financial cycledeviates from the economic cycle or whenfinancial cycles in euro-area countries differ.Monetary policy should focus on its primarymandate of area-wide price stability.

1. Full employment is usu-ally defined as a situation in

which the unemploymentrate is low and only peoplewho are changing jobs are

jobless, but no-one isforced to be unemployedbecause of the weak eco-nomic situation. Price sta-

bility is generally defined asa situation in which inflation

is low. For example, theEuropean Central Bank’s

definition is: “Price stabilityis defined as a year-on-yearincrease in the Harmonised

Index of Consumer Prices(HICP) for the euro area of

below 2 percent.” Seehttps://www.ecb.europa.eu/mopo/strategy/pricestab/ht

ml/index.en.html.

• Micro-prudential supervision, macro-prudentialsupervision, fiscal policy and regulation shouldplay key roles in mitigating financial stabilityrisks. It is still too early to judge the effective-ness of the new European frameworks formicro- and macro-prudential supervision. Theliterature assessing these tools in other juris-dictions has produced some encouragingresults, but the complex European set-up couldmake their implementation less effective.

tional measures were to regain price stability andstimulate growth at a time when short-term nom-inal interest rates reached the zero lower bound.Such measures have different implications for themonetary stance and can influence growth andinflation in various ways (Claeys et al, 2014).Some unconventional measures also aimed atsupporting financial stability.

We do not discuss the merits and drawbacks ofvarious unconventional measures and low inter-est rates to stimulate inflation and growth, butfocus on their possible positive impacts and sideeffects on financial stability. The definition of‘financial stability’ we use is that given by Svens-son (2012): “Financial stability can be defined asa situation where the financial system can fulfilits main functions (of submitting payments,transforming saving into financing, and providingrisk management) with sufficient resilience to dis-ruptions that threaten these functions.” We alsodiscuss policy options to mitigate related risks tofinancial stability, with a focus on the euro area.

We aim to draw lessons from the theoretical and

INTRODUCTION

Following the intensification of the global financialand economic crisis in 2008, central banks inadvanced countries cut policy rates to close to (oreven below) zero and implemented variousunconventional measures. Large-scale asset pur-chases were implemented early on in the UnitedStates, United Kingdom and Japan and have beenintroduced more recently in the euro area. Long-maturity lending to banks was especially signifi-cant in the euro area. These unconventionaloperations led to major expansion in the size ofcentral bank balance sheets (Figure 1). A newapproach to communication, known as forwardguidance, has also been adopted by several cen-tral banks to provide forewarning of expectedmonetary policy measures in the medium-term.Such unconventional measures can result in avery expansionary monetary policy that we call‘ultra-loose’ monetary policy.

The close-to-zero short-term interest rates wereunable to ensure full employment and price sta-bility1.The main aims of the various unconven-

0

1

2

3

4

5

6

7

2000 2002 2004 2006 2008 2010 2012 20140

10

20

30

40

50

60

70

2006 2008 2010 2012 2014

A: Interest rates (% per year) B: Balance sheets (% of GDP)

European Central Bank

Federal Reserve

Bank of England

Bank of Japan

Figure 1: Central bank interest rates and balance sheets

Sources: Bruegel based on European Central Bank, Federal Reserve, Bank of England, Bank of Japan.

THE FINANCIAL STABILITY RISKS OF ULTRA-LOOSE MONETARY POLICYBR U EGE LPOLICYCONTRIBUTION

04

It is useful to distinguish the impacts of uncon-ventional measures at their introduction andduring their implementation, from the impact atthe point of exit from these measures, becausethe impacts can be different at different times. Forexample, cuts in central bank interest rates toclose to zero lead to increases in stock and bondprices (or smaller price declines than otherwise),which initially benefit all asset holders andthereby contribute to financial stability. Subse-quently, as variable interest rate deposits are re-priced and as investors wish to make newfixed-income investments or to roll-over maturingdebt securities, low interest rates reduce thereturn for savers. This may induce them to searchfor riskier higher-yielding assets and increasetheir leverage, which may amplify the risks tofinancial stability. At the time of exit from low inter-est rates and unconventional policies, the effectsmight be opposite to those seen at the introduc-tion of these measures, and might have a negativeimpact on financial stability. We deal in turn withthe effects at each stage.

It is useful to put the importance of different typesof financial institutions into perspective. Table 1shows that credit institutions accounted for abouthalf of the euro-area financial sector in the thirdquarter of 2014, even if their combined balancesheet has shrunk since 2008. Insurance and pen-sion corporations together account for 14 percentand experienced a rapid expansion in balancesheet in the past six years. Investment fundsaccount for 15 percent, money market funds for 1percent, while other financial institutions accountfor 22 percent of the euro-area financial sector.

Table 1: The size of the financial sector in the euro area (€ billions)

2008Q4 Share 2014Q3 Share% change, 2008Q4

to 2014Q3Credit institutions 30,556 57% 30,259 49% -1%Insurance corporations &pension funds

6,159 12% 8,773 14% 42%

Investment funds 4,461 8% 9,147 15% 105%Money market funds 427 1% 461 1% 8%Others 11,836 22% 13,739 22% 16%Total 53,440 100% 62,379 100% 17%Source: European Central Bank for the first four items; Datastream for total, ‘Others’ is our calculation.

empirical literature and from the experiences ofthe United States, United Kingdom and Japan,where central banks adopted aggressive mone-tary easing early on during the crisis. Certainly, thefinancial systems of these countries differ in anumber of aspects from that of the euro area, anddevelopments in the financial sector have beeninfluenced by other policy measures, such asapproaches to bank restructuring, changes infinancial regulation and fiscal policy. Asset pur-chases were introduced in these countries duringthe early part of the crisis, when interest rates inthe US and UK (but not Japan) were much higherthan they were in the euro area at the time assetpurchases were started. Asset purchases pushedgovernment bond yields below zero for severaleuro-area governments – this did not happen inthe US, UK or Japan. But even considering thesedifferences, useful lessons can be drawn from theexperiences of the three countries.

The next section discusses conceptual issuesaround the possible impacts of ultra-loose mone-tary policy on financial stability and assessesthese impacts in the light of the recent experienceof the US, UK and Japan and the current andprospective situation in the euro area. We then dis-cuss policy options to mitigate financial stabilityrisks, before offering some brief concludingremarks.

ULTRA-LOOSE MONETARY POLICY AND FINANCIALSTABILITY: CONCEPTS AND EVIDENCE

Ultra-loose monetary policy can have variousimpacts on financial stability in terms of its directimpact on the financial sector and indirect impactsthrough other domestic sectors and the rest of theworld.


05

Impact through improved general economicconditions

Ultra-loose monetary policies should improve theeconomic outlook, increase the profitability ofnon-financial corporations and reduce unemploy-ment. Financial institutions should benefit fromthese general improvements. For example, theproportion of bad bank loans should be reduced,demand for insurance should be higher and finan-cial investments should increase. All of theseeffects improve financial stability.

Impact on risk taking

Conceptual issues

Lower long-term real interest rates (which resultfrom various unconventional monetary policymeasures) can lead to more risk taking, asChodorow-Reich (2014) argues, using a simpletheoretical model.

Riskier corporate investments will be made and,given the role of the financial system in mediatingbetween savers and borrowers, the financialsector will be exposed to greater risk. Moreover,several financial institutions will actively reach foryields that Chodorow-Reich (2014) defines as“risk taking by financial institutions beyond whatultimate holders of risk would prefer”. Such risktaking might increase financial stability risk. How-ever, as Lucas (2014) points out, from atheoretical point of view the effect of lower yieldson risk taking is indeterminate.

Both Lucas (2014) and Standard and Poor’s(2015) argue that low short-term interest ratesand smaller spreads between short-term andlong-term interest rates might on the contraryreduce risk taking by banks. Reduced risk takingby banks is a consequence of the reduction of theterm premium between long- and short-term inter-est rates. Since the duration of bank assets usedto exceed that of their liabilities, banks profit fromthe spread between long- and short-term interestrates. But when this spread is small, the incentivefor banks to lend at longer maturities is reducedand their lending volume should diminish. Sym-metrically, the incentive to borrow short-term isreduced.

Therefore, whether or not (or by how much) risktaking is increased by various financial institu-tions cannot be firmly determined by theoreticalmodels. An equally important question is if, in gen-eral, the possibility of encouraging risk takingshould be a concern or should be welcomed.According to Lucas (2014) and Standard andPoor’s (2015), encouraging more risk-taking, andthereby more lending, was a key aim of quantita-tive easing in the US, and therefore more risktaking should be regarded as a success of mone-tary policy. The key concern at the time uncon-ventional policies were used was insufficient risktaking: a fear that financial institutions, whichaimed to rebuild their capital after the losses suf-fered during the crisis, would exhibit greater riskaversion than what was socially desirable.

Evidence

Measuring risk taking by financial institutions isdifficult. However, two recent papers using differ-ent identification strategies, Jimenez et al (2014)and Ioannidou et al (2009), show that monetarypolicy affects the composition of the credit supplyand that lower interest rates tend to spur risktaking in bank lending, especially by lower-capi-talised banks.

Banking surveys conducted by central banks alsoinclude a useful indicator in this regard, namelythe change in credit standards, which shows theshare of banks that tighten/ease credit standards.The left panel of Figure 2 on the next page showsthat credit standards were tightened substantiallyin the euro area, the United States and the UnitedKingdom in 2007-09. Subsequently, credit stan-dards were eased in early 2009 in the UK and late2010 in the US, an easing in which ultra-loosemonetary policies might have played a role. How-ever, the magnitude of easing does not lookextraordinary considering the 2007-09 tighteningand the specific measures to clean-up the bankingsystem and the economic recovery (which wasmuch stronger in the US and UK than in the euroarea) should have also played a significant role inthe banks’ ability and willingness to ease creditstandards. Therefore, the experience of the US andUK does not suggest that ultra-loose monetarypolicies have led to excessive risk taking bybanks.


06

fore we do not see an immediate danger to finan-cial stability should credit conditions be eased.

Increasing leverage

Conceptual issues

High leverage is a major source of vulnerability forthe financial sector. Two main mechanisms sug-gest that ultra-loose monetary policy might leadto increased leverage in the financial sector.

First, as argued by Chodorow-Reich (2014), adecline in the safe interest rate reduces the cost ofholding reserves or collateral. For banks with bindingcollateral constraints, a decline in opportunity costcan lead to larger portfolios and higher leverage.

The right panel of Figure 2 shows the same datafor the four largest euro-area countries. While themonetary stance was significantly tighter in theeuro area than in the US and UK, the EuropeanCentral Bank adopted a wide-ranging set of meas-ures to promote lending, such as a relaxed collat-eral policy, 3 and 4-year maturity lending, a lowand, more recently, negative deposit rate forbanks, among others. However, these measureswere not able to encourage banks to ease creditstandards substantially, even in Germany, wherethere is no private debt overhang problem. In thefirst quarter of 2015 there was a sizeable easing inItaly, but this came after the largest tighteningamong the four countries considered in the timeperiod we consider. Euro-area banks still seem tobe rather cautious in supplying credit and there-

-20

0

20

40

60

80

2003 2005 2007 2009 2011 2013 2015

Euro areaUSUKJapan

Negative value: net easing of standards -40

-20

0

20

40

60

80

100

2003 2005 2007 2009 2011 2013 2015

GermanySpainFranceItaly

A: Global comparison B: Four largest euro-area countries

-40Negative value: net easing of standards

Positive value:net tightening of standards

Positive value:net tightening of standards

Figure 2: Banks’ net tightening of credit standards applied to new loans (% of banks)

Source: Bruegel using data from European Central Bank (Bank Lending Survey), Federal Reserve System (Senior Loan OfficerSurvey), Bank of England (Credit Conditions Survey), Bank of Japan (Senior Loan Officer Survey). Note: Data is representedas a net percentage: the percentage of banks reporting tightening of lending standards minus those reporting easing of creditstandards that are applied to new loans. A value of zero implies credit standards have not changed from one period to thenext. A positive value represents tightening credit compared to the previous period, and a negative value represents easingrelative to the previous period.

0

10

20

30

40

50

60

2005 2007 2009 2011 2013

Euro area US UK Japan

0

10

20

30

40

50

2005 2007 2009 2011 2013

Germany Spain France Italy

A: Global comparison B: Four largest euro-area countries

Figure 3: Tier 1 leverage ratio of the largest four banks, 2005-13 (ratio)

Source: Bruegel using SNL Financial. Note: Tier 1 Leverage Ratio.

07


US and Japan, the expansionary monetary poli-cies of recent years did not lead to excessiveequity prices. In the UK, banks’ market-to-bookratios and the price-to-earnings ratio convey thesame message and only the market-to-book ratioof non-financial corporations might signal a too-rapid increase in prices. In the euro area, market-to-book ratios are not excessive either, while theprice-to-earnings ratios recently increased abovehistorical averages, which might suggest a slightover-valuation, but not yet a bubble.

Berg (2015) argues that these standard indicatorshave caveats and considers three other indicatorsof US equity markets. These are the CAPE ratio (theratio of the S&P 500 index to the average earningsof the past ten years), the Q-ratio (the ratio of themarket value of non-financial corporate equitiesto their net worth) and the Buffett indicator (theratio of corporate market value to gross nationalproduct). These indicators suggest relatively highUS equity valuations. While these indicators havecaveats too, Berg (2015) concludes that the USequity market might quickly turn from tranquil toturbulent. He also notes that the current situationdiffers in many ways from the period precedingthe global financial and economic crisis and thefinancial stability implications of an eventualmarket correction could be moderate.

Housing price developments do not suggest anemerging boom either in the US, UK and Japan,despite aggressive monetary policies (Figure 6).There was some increase in housing prices in theUK and US in recent years, but this was notextraordinary in light of the developments of thepast three decades. Regional developmentswithin the UK and US suggest that housing pricesincreased rather rapidly in London and Washing-ton DC, but not elsewhere (Figure 7). The specialdevelopments in these capital cities should beassessed carefully, and in particular, whether theyhave systemic implications for the financial sta-bility of the UK and US, as we discuss in the sec-tion on policies to mitigate financial stability risks.

Negative impact on life insurance companies

Conceptual issues

Banks’ liabilities generally have shorter maturity

Second, as suggested by Brunnermeier and San-nikov (2014c), the low interest rate environmentmight lead to low volatility, which in turn feedsback into banks’ value-at-risk models and encour-ages increases in leverage.

Evidence

Data for the largest banks shows that banking-sector leverage continuously declined from 2007-13 (euro area and UK) or declined during the crisisand remained at a relatively low level (US andJapan), despite expansionary monetary policies(Figure 3). It is likely that regulatory changes,stricter supervision and market pressure playedroles in this development.

Increasing asset prices

Conceptual issues

Unconventional monetary policies reduce long-term interest rates and increase bond and stockprices. Bond prices increase because of falls ininterest rate and also possibly because of falls inrisk premiums. Stock prices increase because ofthe effects of portfolio rebalancing from bonds tostocks, and also because of improved corporateprofits, the reduction in the equity risk premiumand the lower discount rate used to calculate thepresent value of future profits.

Increases in bond and stock prices benefit assetholders, including financial institutions, a phe-nomenon referred to as “stealth recapitalisation”by Brunnermeier and Sannikov (2014a). Suchbenefits improve financial stability when uncon-ventional monetary policies are put in place andcontinue to be implemented.

However, asset prices could increase excessivelyand bubbles might even emerge, especially ifunconventional measures are maintained for longperiods. Such bubbles might pose a future threatto financial stability.

Evidence

Using two standard indicators of equity valuation,the market-to-book value ratio and the price-to-earnings ratio, Figures 4 and 5 suggest that in the

08

BR U EGE LPOLICYCONTRIBUTION THE FINANCIAL STABILITY RISKS OF ULTRA-LOOSE MONETARY POLICY

0

5

10

15

20

25

30

35

1990 1994 1998 2002 2006 2010 2014

Euro-area composite(Germany, Spain, France)S&P 500 (US)FTSE 200 (UK)

0

5

10

15

20

25

30

35

1990 1994 1998 2002 2006 2010 2014

A: Global comparison B: Germany, France, Spain

DAX (Germany)IBEX (Spain)CAC (France)

Figure 5: Price per earnings ratio, 2 January 2000 – 19 March 2015 (ratio)

Source: Thomson Reuters Datastream. Note: the same-colour horizontal dashed lines indicate the 1990-2015 averages

0

1

2

3

4

5

0

1

2

3

4

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

0

1

2

3

4

5

6Euro-area composite (DE, ES, FR, IT)

0

2

4

6

8

10

0

2

4

6

8

10

NFCs Banks

NFCs Banks

NFCs Banks

NFCs Banks

0

2

4

6

8

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

0

2

4

6

8

10

0

2

4

6

8

10

United Kingdom

Germany

France

United States

Japan

Spain

Italy

NFCs Banks

NFCs Banks

NFCs Banks

NFCs Banks

Figure 4: Market to book value ratio (5 largest corporations by sector), 2 Jan 2000 – 19 Mar 2015

Source: Thomson Reuters Datastream.

09


than their assets. But life insurance companiesare typically characterised by the opposite matu-rity mismatch. Whenever the liabilities have muchlonger duration than assets and the return on lia-bilities is fixed or guaranteed, unexpectedly lowinterest rates can challenge profitability and sol-vency. According to the European Insurance andOccupational Pensions Authority (EIOPA) (2014),Moody’s (2015) and Standard and Poor’s (2014),the life-insurance industry in several euro-areacountries is exposed to such risks. Most life insur-ers’ liabilities have long maturities with a guaran-teed minimum return.

However, other (non-life) insurance products aretypically not characterised by such duration mis-

matches and guaranteed returns and these seg-ments of the insurance industry might not facemajor risks arising from persistently low interestrates.

Evidence

The mismatch between the duration of liabilitiesand assets held by life insurance companies isestimated by EIOPA to about 10 years in Germany,Austria and Lithuania. In all other euro-area coun-tries, the mismatch is smaller – about five years inFinland, France, Luxembourg and the Netherlands,while in southern Europe (Greece, Italy, Portugaland Spain) it is below two years. Therefore, Ger-many is particularly exposed to unexpectedly low

0

50

100

150

200

250

300

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

Euro areaUSUKJapan

50

75

100

125

150

175

200

225

250

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

GermanySpainFranceItaly

A: Global comparison, 1983-2014 B: Largest euro-area countries, 1997-2014

Figure 6: Real housing prices (1997=100)

Source: Bruegel based on S&P/Case-Shiller National Home Price Index (United States), Halifax House Price Index (UnitedKingdom), Japan Real Estate Institute (Japan), European Central Bank and Eurostat (DE, ES, FR and IT), Bureau of EconomicAnalysis (United States deflator), Japan Cabinet Office (Japan deflator), Office for National Statistics (United Kingdom deflator).Note: Japan index is proxied by Tokyo Metro Area Index. For the four euro-area countries except Germany, 2014 data iscalculated using data up to 2014 Q3. For Germany, Eurostat data was not available after 2014 Q1, so Bundesbank data up to2014 Q2 was used. All indices deflated by the personal consumption deflator. Euro-area data is a GDP-weighted average of thefirst 11 members of the euro area.

100

150

200

250

300

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

N. IrelandWalesYorks. & Humb.South WestNorthNorth WestEast MidsWest MidsOuter SELondonEast AngliaScotlandOuter Met

50

100

150

200

250

300

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Washington DC

A: 13 UK regions B: 50 US states and Washington DC

London

Figure 7: Regional real housing prices in the UK and US, 1999-2014 (2009Q1=100)

Source: Bruegel based on Nationwide House Price Index and Office for National Statistics and Federal Housing Finance AgencyHouse Price Index and Bureau of Labor Statistics. Note: Deflated by the CPI.

10


unfavourable global spillovers from its quantita-tive easing policy. Quantitative easing and lowinterest rates in the US boost capital outflow fromthe US to emerging countries, which can find it dif-ficult to cope with the consequences of capitalinflows (appreciating exchange rates and reduc-tions in interest rates). During the recent globalcrisis, several emerging countries introduced var-ious capital control measures and in the contextof excessive capital inflows, talks about ‘currencywar’ intensified3. Excessive and volatile capitalinflows to emerging countries can destabilisethese countries, which could weaken their eco-nomic performance or even provoke financialcrises, with adverse feedback effects foradvanced countries and their financial stability.

Evidence

Despite all the media attention surrounding ‘cur-rency wars’ and volatile capital flows resultingfrom ultra-loose monetary policies in advancedcountries, emerging economies continue to thriveand their outlook has not changed substantiallycompared to the pre-crisis period, as shown byvarious vintages of the IMF World Economic Out-look. The increased resilience of emerging coun-tries can be attributed to their bettermacroeconomic policies. For example, excessivecurrent account imbalances are rare and publicdebt tends to be rather low in these countries.

Impact through public finances

Ultra-loose monetary policies also impact publicfinances by reducing borrowing costs, increasinginflation, improving the economic outlook (whichin turn increases tax revenues) and throughincreased transfer of profits from central banks tothe government (see Claeys et al, 2015). Thesefactors improve the sustainability of public debt,and reduce the likelihood of a sovereign debtcrisis and the associated financial instability.

Exit from unconventional monetary policies

Exit from the current mix of ‘loose’ conventionaland unconventional monetary policies couldpotentially reverse the effects that arose at theintroduction and during the implementation ofsuch policies. For example, exit can increase

interest rates, which is a concern for financial sta-bility. According to both Moody’s (2015) and Stan-dard and Poor’s (2014), German life insurers havesome options for mitigating the negative impactsof declining investment returns, such as reducingexpenses or investment returns to policyholders,diversifying their portfolios towards new assetclasses, such as infrastructure and real estate,and re-pricing new sales. Stress tests conductedby EIOPA underline the vulnerability of German lifeinsurers to a prolonged period of low interest rates.Recent EU (Solvency II) and specific German reg-ulatory changes affecting life insurance providersshould improve the long-term stability of thesector, but the transition during the next few yearscould pose special challenges if interest rates staylow.

However, both Moody’s (2015) and Standard andPoor’s (2014) are positive about the outlook fornon-life insurance products. For insurers that arepresent on both life and non-life markets, non-lifeinsurance returns can compensate for reducedprofits from life insurance. It is difficult to obtaindata on the relative weight of life and non-lifeinsurance, so we collected data from SNL Finan-cial on the sum of life and health premiums as ashare of total premiums for the largest 20 insur-ance companies in each country. The shares are57 percent in Germany, 68 percent in France, 73percent in Italy and 34 percent in Spain. Therefore,life and health insurance together account for a bitmore than half of total insurance in Germany, sothe compensating impact from non-life insurancecan be sizeable2. In France and Italy the shares oflife and health insurance are higher than in Ger-many, but in these countries life insurers are notcharacterised by such a large duration mismatchas German life insurers.

Adverse feedback from emerging countries

Conceptual issues

It has long been established that monetary loos-ening/tightening in the US and other advancedcountries can have profound effects on emergingmarkets (see eg Eichengreen and Mody, 1998).During the recent global financial and economiccrisis, several emerging-country policymakersaccused the Federal Reserve of ignoring the

2. Furthermore, note thatnot all life insurance poli-

cies offer guaranteedreturns. For example, the

returns from unit-linked andindex-linked policies

depend on investment per-formance.

3. See Darvas and Pisani-Ferry (2010) for a discus-

sion of the currency wardebate.

11


short-term and long-term interest rates, reducestock, bond and housing prices, reduce risk-taking, weaken public debt sustainability andcreate volatility in emerging markets. Therefore,the ending of asset purchase programmes and thereversion of interest rates to higher levels shouldbe carefully managed at a time when the economyhas strengthened and inflation is expected toincrease towards the central bank’s target in themedium term. It is also crucial that the move awayfrom ultra-low interest rates is adequately pre-announced. In our assessment, the FederalReserve and the Bank of England were able to stoptheir large-scale asset purchase programmeswithout any lasting negative impact on financialmarkets and seem so far to be exiting smoothlyfrom ultra-loose interest rates. In the euro area, thesmoothness of the eventual exit will likely dependon inflationary and output developments in thecoming years, and on the duration of loose mone-tary policies.

POLICIES TO MITIGATE FINANCIAL STABILITY RISKS

The global financial crisis has demonstrated thatprice stability in itself is not sufficient to ensurefinancial stability. Bubbles and boom-bust creditcycles emerged that eventually led to very highcosts in terms of reduced output and unemploy-ment in several advanced countries. A broad con-sensus has emerged that financial stability issuesshould be addressed ex ante.

As summarised by Smets (2013), three viewsnow coexist on how financial stability should beachieved:

• The first view, held for instance by Svensson(2012, 2014), considers that only minimalchanges to the inflation-targeting regime put inplace by most central banks since the 1990sare necessary, as long as micro- and macro-prudential policies are implemented forcefully.

• The second view, developed by variousresearchers from the BIS long before the crisis,such as Borio & Lowe (2002), Crockett (2003)and White (2006), favours a so-called “leaningagainst the wind” (sic) monetary policy. Pro-ponents of this view regard macro-prudentialpolicies as insufficient to address financialcycles and argue that in some situations mon-

etary policy should be tightened more quicklyor beyond what inflation forecasts would callfor in response to financial stability concerns.

• The third view, held for instance by Brunner-meier and Sannikov (2014b), calls for a moreradical rethink of monetary policy on the basisthat price stability and financial stability policyare indistinguishable.

Should monetary policy target financial stabilityexplicitly?

As we argued in the previous section, monetarypolicy interacts strongly with potential drivers offinancial instability. Financial instability can havelarge negative feedback effects on price stabilitythrough a credit crunch, but also on the conductof monetary policy itself, as the recent globalfinancial and economic crisis demonstrated.When monetary policy is constrained by the zerolower bound, it has to resort to unconventionaltools with less-clear effects. Also, in the bustphase of the financial cycle, central banks willhave to play the role of lender of last resort forbanks to save solvent financial institutions fromcollapsing in case of a liquidity crisis.

The EU Treaty makes price stability the primarymandate of the European System of Central Banks(ESCB, ie the ECB and national central banks)4, butit also requires the ESCB to “promote the smoothoperation of payment systems”5 and to “con-tribute to the smooth conduct of policies pursuedby the competent authorities relating to the pru-dential supervision of credit institutions and thestability of the financial system”6.

Do the interactions between price and financialstability and the specific provisions of the EUTreaty mean that financial stability has to be takeninto account in ECB monetary policy decisions?

The use of interest rates to prevent the build-up offinancial imbalances appears to be ineffective. Asshown by Posen (2009), it is difficult to find a clearrelationship between interest-rate tightening andthe growth rate of asset prices. Indeed, inepisodes of bubbles in 17 countries in the periodpreceding the crisis, increases in the policy ratethat were implemented at the time did not seemto have any clear and rapid impact on asset prices.

4. Article 127.1 of the Treatyon the Functioning of the

European Union (TFEU).

5. Article 127.2 of the TFEU.

6. Article 127.5 of the TFEU.

12


For the United Kingdom, which experienced amajor housing bubble before the crisis, Bean et al(2010) estimated that additional increases in theBank of England’s main rate by several percent-age points would have been needed to stabilisehouse prices. Such interest rate increases wouldhave reduced inflation to levels significantly belowthe Bank of England’s 2 percent target, and wouldhave had significant negative effects on output.

A further problem in targeting financial stabilitywith monetary tools is that monetary policy tight-ening might not actually have the desired effectof reducing financial imbalances. As pointed outby Svensson (2014), Swedish monetary policy atthe beginning of the 2010s provides a bad exam-ple of a central bank trying to implement anaggressive “leaning against the wind” policy toaddress some financial stability issues, which ledto high costs in terms of economic activity and amajor undershooting of its inflation target. Facedwith a rising household debt-to-income ratio, theRiksbank increased its policy rate from 0.25 per-cent in July 2010 to 2 percent in July 2011. As aresult, inflation fell quickly and was around zerofor more than two years, well below the 2 percenttarget, ultimately forcing the central bank toreverse its actions7. However, although the Riks-bank initially aimed to ward off the threat to finan-cial stability from household over-indebtedness,the household debt-to-income ratio was notaffected by the 2010-11 policy of tightening andin fact the ratio continued to increase in real termsbecause of the very low or even negative inflationrates.

Monetary tightening for reasons of financial insta-bility may have other unintended effects, espe-cially in open economies. An increase in capitalinflows because of higher interest rates can par-tially offset the dampening effect on credit ofhigher rates. Higher interest rates might also leadto a currency appreciation. Both capital inflowsand/or currency appreciation could accentuatethe shift from the tradable to the non-tradablesector that often takes place when there is a real-estate boom. Or, as shown by Nelson et al (2015),a monetary tightening can also cause a migrationof activity from the regulated banking sector to theshadow-banking sector.

To summarise, the various issues we havereviewed show that the main monetary policyinstrument, the interest rate, is too broad aninstrument, and ultimately quite ineffective indealing with the build-up of financial imbalances.More generally, it makes little sense to assign thesame instrument to two objectives: price andfinancial stability. Sometimes the implications ofthese two objectives coincide, but a trade-offbetween them emerges when business and finan-cial cycles are desynchronised. As shown byDrehmann et al (2012), this could often be thecase given that financial cycles are much longerthan traditional business cycles. Moreover, in thecase of a monetary union like the euro-area, a“leaning against the wind” monetary policy couldbe even more difficult to put in place becausefinancial cycles in different countries are oftendesynchronised, as argued by Darvas and Merler(2013) and more recently by Merler (2015).

Policies to foster financial stability

More targeted and suitable measures should beused to deal with financial-stability risks. We listfour specific policies.

Micro-prudential policy

The goal of micro-prudential policy is to ensure thesoundness and to prevent the failure of financialinstitutions. There are several market failures thatcan lead to the underestimation of risk at the banklevel, which is a reason for strict regulation andsupervision. Market failures include asymmetriesof information, negative externalities for the widereconomy that result from the failure of a financialinstitution and which are often not internalised, oreven moral hazard problems arising from the ‘toobig to fail’ problem or the existence of other publicpolicies such as deposit insurance or the lender-of-last-resort policy of central banks.

Micro-prudential regulation and supervision wereinsufficient to prevent the build-up of financial vul-nerabilities in the pre-crisis period. As a conse-quence, regulation of financial activities wastightened globally, including in the EU. In particu-lar, new regulations8 require higher and betterquality capital ratios commensurate with the risksto which banks are exposed, more conservative

7. The Riksbank has not justcut its deposit rate to a

deeply negative value (-1percent), but also cut its

repo rate (at which bankscan borrow funds from the

Riksbank for a period ofseven days) to a negative

value, -0.25 percent, inMarch 2015.

8. Various legislativepackages (such as the

Capital RequirementsDirective IV and the CapitalRequirements Regulation)were adopted to transposeBasel III recommendations

into EU law.

13


liquidity ratios, such as the Liquidity CoverageRatio and the Net Stable Funding Ratio, and limitson leverage.

Various new authorities9 have been set up, but themost significant EU institutional development wasthe set-up of the Banking Union. In the euro area(and countries outside the euro area wishing tojoin) the Single Supervisory Mechanism (SSM) willenable the ECB to supervise large financial insti-tutions in order to ensure a uniform regime that isless subject to political capture, and to avoidcross-border externalities previously caused bynational supervision. Since November 2014, theECB has supervised significant credit institutionsand is therefore responsible for various tasksaimed at fostering a stable financial framework.Such tasks include authorising banks to operateand assessing their assets and liabilities to ensurecompliance with the regulations on exposurelimits, leverage, liquidity, transparency of infor-mation, risk management processes, internal con-trol mechanisms and remuneration practices.

Macro-prudential policy

Healthy individual financial institutions are a nec-essary but not sufficient condition to ensure sta-bility of the financial system. Indeed, anothermarket failure needs to be corrected: the under-estimation of system-wide risk arising from theinterconnections between institutions that is notinternalised by them. These interconnectionsarise because financial institutions have corre-lated balance sheets because of the similarity oftheir asset portfolios, because of the intercon-nectedness of networks that creates the potentialfor quick contagion, and finally because of poten-tial fire sales taking place during stress episodes.

Macro-prudential policy has two main goals inrespect of these potential systemic effects: toincrease the resilience of the financial system andto tame the financial cycle with more targeted toolsthan monetary policy. More specifically, as sug-gested by Smets (2013), macro-prudential policyshould have four intermediate targets: mitigate andprevent excessive credit growth and leverage, mit-igate and prevent excessive maturity and liquiditymismatch, limit excessive exposure concentra-tions and finally limit bail-out expectations.

In order to perform these tasks, macro prudentialtools can be roughly divided into two main cate-gories, as suggested by Blanchard et al (2013):tools seeking to influence lenders’ behaviour,such as time-varying capital requirements, lever-age ratios or dynamic provisioning, and toolsfocusing on borrowers’ behaviour, such as ceilingson loan-to-value ratios (LTVs) or on debt-to-incomeratios (DTIs)10. These tools have the advantage ofallowing the regulator to target a particular sectoraffected by financial imbalances, for instance thereal-estate sector. Moreover, these measures havethe additional advantage that they can be tailoredto country-specific circumstances, which is espe-cially important in a heterogeneous monetaryunion.

It is still difficult to judge the effectiveness ofmacro-prudential instruments in increasing theresilience of the financial system and dampeningthe financial cycle. Even though their use wasadvocated as early as the beginning of the 2000sby the BIS, they have only gained some relevancesince the financial crisis. Macro-prudential poli-cies are new and mainly under construction, espe-cially in advanced economies, so evidence of theireffectiveness is still limited. However, the recentliterature assessing these measures has pro-duced some encouraging results. They show inparticular that carefully setting limits on ratios,such as the LTV and the DTI, could help to tamefinancial imbalances11.

A potential limitation of macro-prudential tools isthat they can be subject to regulatory arbitrage,either by provoking greater cross-border borrow-ing (Cerutti et al, 2015) or by migration of activi-ties from banks to the shadow-banking sector. AsTable 1 shows, the size of non-banks in the totaleuro-area financial sector has increased in recentyears. Given that the shadow-banking sector hasbecome one of the main sources of systemic risk,one of the main challenges in the next few yearswill be to find instruments that have an impact onthe banking activities of non-banks. For instance,in the US, the 2010 Dodd-Frank Act widened theremit of the Federal Reserve, allowing supervisorsfrom the newly created Financial Stability Over-sight Council to oversee non-bank financial insti-tutions that they deem to be systemicallyimportant12. In Europe, the creation of the Euro-

9. The European BankingAuthority (EBA), the

European Insurance andOccupational Pensions

Authority (EIOPA), theEuropean Securities and

Markets Authority (ESMA),the Joint Committee of the

European SupervisoryAuthorities (ESAs).

10. Blanchard et al (2013)also classify a third category:capital controls targeting ‘hot

money’ flows (which theycall “capital flow manage-ment tools”), but because

capital controls are notallowed in the EU, we do not

consider these tools.

11. Borio and Shim (2007),building on the early experi-ences of 15 countries, show

that macro-prudential poli-cies can slow down a credit

expansion. Lim et al(2011), using case studies,

show mixed results, withmacro-prudential instru-ments effective in some

countries but not in othersdepending on what type of

instrument is used. Iganand Kang (2011) and Kim(2013) show that LTV and

DTI ratios had some impacton prices and transactions

when they were imple-mented in Korea. Jimenez

et al (2012), focusing onSpain before the crisis,

show that dynamic provi-sioning have reduced ex-post losses but were not

effective enough to avoidthe bubble. However, this

could be due to the loweringof the ceiling of the

dynamic provision funds atthe beginning of 2005,

which resulted in a lowerflow of provisions at the

bank level and in a drop ofthe stock of provisions as a

percentage of total loans.Kuttner and Shim (2013),

with a 57-country panel,show that the DTI ratio had a

significant effect on hous-ing credit growth. Finally,Cerutti et al (2015) docu-

ment the use of various

14


pean Systemic Risk Board (ESRB) in 2010 and thedelegation of some macro-prudential authority tothe ECB by the Single Supervisory Mechanism(SSM) regulation13 was beneficial, in our view.However, possibly because of diverging nationalinterests, macro-prudential supervision is sharedbetween the ECB and national authorities. Asargued by Darvas and Merler (2013), the ECB canonly apply those tools in order to seek to influencelenders’ behaviour, as categorised by Blanchardet al (2013), but cannot apply tools aimed at con-trolling borrowers’ behaviour, such as LTV and DTIratios. The ECB's limited remit might well be theweakness of the institutional arrangement, but thepractice of macro-prudential policies will show ifthis limitation is severe or if cooperation betweenthe ECB and national authorities, under the watchof the ESRB, ensures the proper implementationof the various macro-prudential tools.

Fiscal policy and regulation of bubble-pronesectors

Certain national policies can amplify financialinstability and thereby weaken the impact ofimproved micro-prudential supervision and thenew macro-prudential frameworks. For example,subsidies and favourable tax treatment of hous-ing, including mortgages, can foster credit andhousing booms. Therefore, fiscal authoritiesshould cooperate with the authorities responsiblefor financial stability and design a joint action planto tame financial excesses. For instance, Posen(2009) proposes to add to the financial stabilitytoolkit a countercyclical real estate tax that wouldnot have significant implications for tax revenueover the cycle, but that could potentially be effec-tive in dealing with price swings in the housingsector. In their empirical study Kuttner and Shim(2013) also show that changes in housing-relatedtaxes had significant impacts on house-priceappreciation.

Another possible measure is the regulation ofbubble-prone sectors, such as construction.Excessive construction booms (which are charac-terised by a sizeable expansion of this sector)tend to end in painful correction. Certain limita-tions on the construction industry, like curtailingthe number of building permits, or tightening theleverage of construction firms, can complement a

concerted response against emerging bubbles.Such regulation would not prevent a price bubbleoccurring, and in fact might lead to an even largerincrease in housing prices if the supply of housesis limited. Nevertheless, a pure house-pricebubble is less dangerous than a constructionbubble, which also involves the suboptimal redi-rection of the factors of production to the con-struction industry, which typically leads to painfulcorrection during the bust.

CONCLUDING REMARKS

We believe that the ECB should have implementedan extended asset purchase programme earlier(Claeys et al, 2014), but it is better late than neverand the launch of such a programme in March2015 is welcome. There is a clear downward trendin headline and core inflation and a dangerousdecline in inflation expectations. The ECB is not ful-filling its price-stability objective. Too-low inflationmakes the relative price adjustments neededbetween the euro-area core and the periphery, aswell as public and private sector deleveraging,more difficult. It also runs the risk of a Japanesescenario with persistently low inflation.

The new extended asset purchase programme,combined with all the other non-conventionalmonetary policy measures implemented since2008 to avoid a full-scale liquidity crisis in thebanking sector and the break-up of the euro area,will contribute to an ultra-loose monetary policystance that should stimulate growth and bringinflation back towards the 2 percent threshold.

Ultra-loose monetary conditions could also haveadverse consequences for financial stability. How-ever, in our assessment, the benefits of ultra-loosemonetary conditions outweigh their potential risksto financial stability. The ECB should neverthelessbe aware of the financial stability consequencesof its monetary policy actions. Micro and macro-prudential policies, to which the ECB will now con-tribute via the SSM and the ESRB, shouldconstitute the first line of defence to addressfinancial stability concerns and avoid the build-upof financial imbalances in the euro area.

macro-prudential policies ina sample of 113 countries-

from 2000-13 and showthat they can have signifi-

cant effects on credit devel-opments in the boom phase

of the cycle.

12. This was alreadyapplied to institutions such

as AIG and GE Capital as ofJuly 2013.

13. Seehttp://ec.europa.eu/finance/gen

eral-policy/banking-union/single-supervisory-

mechanism/index_en.htm.

15


REFERENCES

Bean, C., Paustian, M., Penalver, A. and Tim, T. (2010) ‘Monetary policy after the fall’, speech to Fed-eral Reserve Bank of Kansas City Annual Conference, Jackson Hole, Wyoming, 28 August

Berg, T. (2015) ‘Quicksilver Markets’, Brief Series 15-02, Office of Financial Research, available athttp://financialresearch.gov/briefs/files/OFRbr-2015-02-quicksilver-markets.pdf

Blanchard, O., Dell'Ariccia, G. and Mauro, P. (2013) ‘Rethinking macro policy II: getting granular’,Staff Discussion Note, International Monetary Fund

Borio, C. and Lowe, P. (2002) ‘Asset prices, financial and monetary stability: exploring the nexus’,Working Papers No 114, Bank for International Settlements

Borio, C. and Shim, I. (2007) ‘What can (macro-) prudential policy do to support monetary policy?’Working Papers No 242, Bank for International Settlements

Brunnermeier, M. and Sannikov, Y. (2014a) ‘The I theory of money', Working Paper, Princeton Uni-versity

Brunnermeier, M. and Sannikov, Y. (2014b) ‘Monetary Analysis: Price And Financial Stability’, ECBForum On Central Banking. Sintra, Portugal, 26 May, available athttp://scholar.princeton.edu/sites/default/files/05c%20ECB%20Sintra%20BruSan_0.pdf

Brunnermeier, M. and Sannikov, Y. (2014c) ‘A Macroeconomic Model with a Financial Sector’, Ameri-can Economic Review 104(2), pp 379-421

Cerutti, E., Claessens, S. and Laeven, L. (2015) ‘The Use and Effectiveness of Macroprudential Poli-cies: New Evidence’, Working Paper No. 15/61, International Monetary Fund

Chodorow-Reich, G. (2014) ‘Effects of Unconventional Monetary Policy on Financial Institutions’,Brookings Papers on Economic Activity, Spring, pp 155-204, available athttp://www.brookings.edu/~/media/projects/bpea/spring-2014/2014a_chodorowreich.pdf

Claeys, G., Leandro, A. and Mandra, A. (2015) ‘European Central Bank quantitative easing: thedetailed manual’, Policy Contribution 2015/02, Bruegel, available at http://www.bruegel.org/publica-tions/publication-detail/publication/872-european-central-bank-quantitative-easing-the-detailed-manual/

Claeys, G., Darvas, Z., Merler, S. and Wolff, G. (2014) ‘Addressing weak inflation: The European Cen-tral Bank's shopping list’, Policy Contribution 2014/05, Bruegel, available athttp://www.bruegel.org/publications/publication-detail/publication/826-addressing-weak-inflation-the-european-central-banks-shopping-list/

Crockett, A. (2000) ‘Marrying the Micro- and Macro-prudential Dimensions of Financial Stability’,speech to Eleventh International Conference of Banking Supervisors, Basel, 20-21 September

Darvas, Z. and Pisani-Ferry, J. (2010) ‘The threat of “currency wars”: A European perspective’,Policy Contribution 2010/12, Bruegel, available at: http://www.bruegel.org/publications/publication-detail/publication/461-the-threat-of-currency-wars-a-european-perspective/

Darvas, Z. and Merler, S. (2013) ‘The European Central Bank in the age of banking union’, PolicyContribution 2013/13, Bruegel, available at: http://www.bruegel.org/publications/publication-detail/publication/796-the-european-central-bank-in-the-age-of-banking-union/

Drehmann, M., Borio, C., and Tsatsaronis, K. (2012) ‘Characterising the financial cycle: don't losesight of the medium term!’ Working Papers No. 380, Bank for International Settlements

Eichengreen, B. and Mody, A. (1998) ‘Interest Rates in the North and Capital Flows to the South’,International Finance, Volume 1, Issue 1, pp 35–57

European Insurance and Occupational Pensions Authority (2014) EIOPA Insurance stress test2014, available at: https://eiopa.europa.eu/Publications/Surveys/Stress%20Test%20Report%202014.pdf

Igan, D. and Kang, H. (2011) ‘Do Loan-To-Value and Debt-To-Income Limits Work? Evidence FromKorea’, Working Paper No. 11/297, International Monetary Fund

Ioannidou, V., Ongena, S. and Peydro. J.-L. (2009) ‘Monetary Policy, Risk-Taking and Pricing: Evi-dence from a Quasi-Natural Experiment’, European Banking Centre Discussion Paper No. 2009-04S

Jiménez, G., Ongena, S., Peydró, J.-L. and Saurina, J. (2012) ‘Credit Supply and Monetary Policy:

16


Identifying the Bank Balance-Sheet Channel with Loan Applications’, American Economic Review,Volume 102(5), pp 2301-26

Jiménez, G., Ongena, S., Peydró, J.-L. and Saurina, J. (2014) ‘Hazardous Times for Monetary Policy:What Do Twenty-Three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk-Taking?’ Econometrica, vol. 82(2), pp 463-505

Kuttner, K. and Shim, I. (2013) ‘Can Non-Interest Rate Policies Stabilize Housing Markets? Evi-dence from a Panel of 57 Economies’, Working Paper No. 433, Bank for International Settlements

Lim, C., Columba, F., Costa, A., Kongsamut, P., Otani, A., Saiyid, M., Wezel, T. and Wu, X. (2011)‘Macroprudential Policy: What Instruments and How to Use Them? Lessons from Country Experi-ences’, Working Paper 11/238, International Monetary Fund

Lucas, D. (2014) ‘Comments on Gabriel Chodorow-Reich’s article “Effects of Unconventional Mone-tary Policy on Financial Institutions”’, Brookings Papers on Economic Activity, Spring, pp 205-209,available at http://www.brookings.edu/~/media/projects/bpea/spring-2014/2014a_chodorowreich.pdf

Merler, S. (2015) ‘Credit cycles, capital flows and macro prudential policy in the Euro area’, WorkingPaper, Bruegel, forthcoming

Moody’s (2015a) ‘European insurers face credit-negative quantitative easing program’, Sectorcomment, Moody’s Investors Service, 26 January

Moody’s (2015b) ‘Life outlook remains negative as low interest rates weaken the sector; P&Cstable’, Outlook, Moody’s Investors Service, 4 February

Nelson, B., Pinter, G. and Theodoridis, K. (2015) ‘Do contractionary monetary policy shocks expandshadow banking?’ Working Paper No. 521, Bank of England

Posen, A. (2009) ‘Finding the right tool for dealing with asset price booms’, speech to MPR Mone-tary Policy and Markets Conference, London

Smets, F. (2014) ‘Financial Stability and Monetary Policy: How Closely Interlinked?’, InternationalJournal of Central Banking, June

Standard and Poor’s (2014a) ‘Euro money market funds are well-positioned to retain assetsdespite negative yields’, Ratingsdirect, Standard & Poor’s Ratings Services, 16 October

Standard and Poor’s (2014b) ‘European insurance credit outlook 2015: As Solvency II looms, lowinterest rates increase the heat’, Ratingsdirect, Standard & Poor’s Ratings Services, 10 December

Standard and Poor’s (2015) ‘How will Europe’s bank weather subzero rates?’ Ratingsdirect, Stan-dard & Poor’s Ratings Services, 12 March

Stein, J. (2012) ‘Monetary Policy as Financial Stability Regulation’, Quarterly Journal of Economics,vol. 127(1), pp 57-95

Svensson, L. (2012) ‘The relation between monetary policy and financial policy’, InternationalJournal of Central Banking, Volume 8 No. S1, pp 293-5

Svensson, L. (2014) ‘Monetary policy and financial-stability are different and normally best con-ducted independently’, comments on Brunnermeier and Sannikov, ECB Forum on Central Banking,May

White, W. (2006) ‘Is price stability enough?’ Working Papers No.205, Bank for InternationalSettlements

Documents

CONTRIBUTION THE FINANCIAL ULTRA-LOOSE ...bruegel.org/wp-content/uploads/imported/publications/pc...THE FINANCIAL STABILITY RISKS OF ULTRA-LOOSE MONETARY POLICY GRÉGORY CLAEYS AND