The ECB after the crisis: Existing synergies among monetary policy, macroprudential policies, and banking supervision

The ECB has seen its responsibilities significantly expanded since the unfolding of the Global Crisis (2007-2009) and the subsequent euro area sovereign debt crisis (2010-2012). Before the financial crisis, banking supervision in Europe was characterised by differing supervisory practices and regulatory frameworks, and an inadequate exchange of information. Such heterogeneity contributed to spreading the financial crisis through a lack of information and the erosion of trust, and slowed its resolution. It accompanied an adverse feedback loop between weak banks, indebted sovereigns and fragile economies (Schoenmaker 2009, Shambaugh 2012). Some euro area countries experienced sudden stops followed by a reversal of financial flows, mostly through banks. This was followed by a credit squeeze, with credit to households and firms drying up. 

In 2012, European leaders decided to establish a pan-European supervisory authority at the ECB. The final assent for the Single Supervisory Mechanism (SSM) came in 2013 when the European Council agreed to the actual launch of a banking union based on the proposal by the European Commission.  After the necessary preparatory work, in November 2014 we saw the start of direct banking supervision (microprudential) and an important role in financial stability (macroprudential) were added to the monetary policy responsibilities of the ECB. In a recent paper (Cassola et al. 2019), we explain in some detail, for a wide audience, what it meant for the organisational structure of the ECB, guiding the reader through the intrinsic complexity of the current setting. For that, we bring together in a single document otherwise dispersed information providing a backdrop for and inviting analytical work to follow. We also introduce the current academic debate on the synergies, complementarities, and potential conflicts of having a single institution endowed with the three responsibilities.   

Our analysis is structured around three questions: Why this choice? What are the working arrangements of this enlarged ECB? And what are the similarities and synergies among these three functions? 

Why this choice?

There were obvious benefits to be gained by conferring supervisory tasks to the ECB. Through its central banking functions, the ECB had already developed strong expertise in financial sector issues. In addition, there is a close relationship between microprudential supervision of individual institutions and the assessment of risks to the financial system, implying that there could be clear synergies in putting the two tasks under the same roof. There were also likely to be information-related synergies between bank supervision and payments system oversight. Furthermore, there were strong operational reasons for establishing the SSM at the ECB. The ECB had already built the infrastructure needed to operate the single monetary policy, had gained the trust of financial markets, and had successfully organised and was running a network of Eurosystem technical committees. However, there is another side to the debate about integrating banking supervision in central banks. Several experts warn against reputational risks and possible conflicts of interest. These, and other caveats, are discussed in the paper (see also Tucker 2018). 

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What are the working arrangements of this enlarged ECB? 

The degree of centralisation and decentralisation in executing the three functions is different. In the case of monetary policy, decisions are centralised while national central banks perform almost all of the Eurosystem’s operational tasks. However, there is a strong centre for functional reasons, i.e. for the singleness of monetary policy and a clear euro area perspective (Ampudia et al. 2019). For microprudential supervision, a mix of strong centralisation, a harmonised approach and strong coordination is instead necessary for larger financial institutions. The need for centralisation is principles-based: it ensures a level playing field, consistency, and equal treatment among financial institutions. The governance of macroprudential oversight is different: it is shared among national authorities, the ECB and other supranational entities (see also Constâncio et al. 2019). National authorities have the power to implement macroprudential measures and the ECB has the power to adopt more stringent measures, if necessary. The analysis of financial risks at the national and euro area levels and their cross-border effects is organised around regular reporting to and discussion in the Financial Stability Committee. National authorities have a wide range of tools to implement macroprudential measures, whereas the ECB has topping-up powers only for the tools embedded in the Capital Requirements Directive (CRD IV) and the Capital Requirements Regulation (CRR). 

All policy decisions in the Eurosystem are taken by the Governing Council. The Executive Board prepares monetary policy decisions to be taken by the Governing Council, while the SSM Supervisory Board prepares banking supervision decisions subject to the “non-objection procedure”. Despite the new tasks acquired, the ECB’s primary objective remains the pursuit of price stability. Owing to their distinct nature, the ECB’s three functions entail differences in preparation cycles and frequency of decision-making meetings, as well as available policy instruments.

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What are the complementarities and conflicts of these functions?

There are several levels of overlaps, synergies, and complementarities. Four levels stand out from the literature. The first level is that micro- and macroprudential policies might support monetary transmission by reducing pro-cyclical tendencies of the financial system. The second level is the monitoring of changes in the balance sheet of households, firms, and financial institutions. The third level is the identification of the nature of shocks hitting the economy and the choice of the best policy response (or mix) to offset it/counter it. The fourth element requires avoiding a polarised response that is either too mechanical and potentially rushed or too bland and late. With respect to tensions between monetary policy and banking supervision, it can entail reputational risks for the central bank following banking failures and lead to biased decision-making. There is also potential for tensions between macroprudential policies and microprudential supervision, as they are conducted using similar types of instruments (capital requirements, risk weight floors, exposure limits, etc.) but have different intermediate objectives (Constâncio 2016, Schoenmaker and Véron 2016). 

Nevertheless, a prominent example of an area where there are clear synergies and complementarities between the micro- and macroprudential functions (and to some extent also with monetary policy) is stress testing. The outcome of the supervisory solvency stress test exercises feeds into the overall process to ensure adequate levels of capital and liquidity in institutions, comprehensive coverage of risks, and sound internal processes. Still, the macroprudential stress test approach has four components that go beyond, and complement, what is typically captured by microprudential stress tests: 

  1. A dynamic dimension that takes account of the bank’s reaction to the stress implied by the adverse scenario (e.g. deleveraging, portfolio reshuffling, and capital raising).
  2. A comprehensive two-way interaction between banks and the real economy resulting from banks’ balance sheet adjustments that may lead to macro-feedback effects, potentially amplifying the initial shock to the economy and its impact on banking sector solvency.
  3. The assessment of contagion effects stemming from interconnectedness among financial institutions, including non-banks in the shadow banking sector. 
  4. The integration of system-wide liquidity assessment which aims at accounting for the fact that liquidity and solvency can be interconnected in individual banks and within the financial system as a whole (e.g. Dees et al., 2017, Budnik et al. 2019). These exercises in turn provide valuable information for assessing the macroprudential policy stance and may support of decisions on and calibration of macroprudential measures.
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Authors’ note: The views expressed are our own and do not necessarily represent those of the ECB or the Eurosystem.


Ampudia, M, T Beck, A Beyer, J-E Colliard, A Leonello, A Maddaloni, D Marques-Ibanez (2019), “The new supervisory architecture in Europe”,, 20 September.

Budnik,K, M B Mozzanica, I Dimitrov, J Gross, I Hansen, G di Iasio, M Kleemann, F Sanna, A Sarychev, N Sinenko and M Volk (2019), “Macroprudential stress test of the euro area banking system”, ECB Occasional Paper No. 226. 

Cassola, N, C Kok and F P Mongelli (2019), “The ECB after the crisis:  existing synergies among monetary policy, macroprudential policies and banking supervision”, ECB Occasional Paper No. 237.

Constâncio, V (2016) ,“Principles of Macroprudential Policy”, speech given at the ECB-IMF Conference on Macroprudential Policy, Frankfurt am Main, 26 April. 

Constâncio V, I Cabral, C Detken, J Fell, J Henry, P Hiebert, S Kapadia, S Nicoletti Altimari, F Pires and C Salleo (2019), “Macroprudential policy at the ECB: Institutional framework, strategy, analytical tools and policies”, ECB Occasional Paper No. 227.

Dees, S, J Henry and R Martin (2017), “STAMP€: Stress Test Analytics for Macroprudential Purposes in the euro area”, ECB, February.

Schoenmaker, D (2009), “The financial crisis: Financial trilemma in Europe”,, 19 Decvember.

Schoenmaker, D. and N Véron (2016) “European banking supervision: Compelling start, lingering challenges”,, 25 June.  

Shambaugh, J (2012), “The Euro’s Three Crises”, Brookings Papers on Economic Activity, Spring. 

Tucker, P (2018), Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State, Princeton University Press.