Macroprudential Banking Supervision & Monetary Policy : Legal Interaction in the European Union

"The European experience suggests that the efforts made to achieve an efficient trade-off between monetary policy and prudential supervision ultimately failed. The severity of the global crisis have pushed central banks to explore innovative tools--within or beyond their statutory constraints--capable of restoring the smooth functioning of the financial cycle, including setting macroprudential policy instruments in the regulatory toolkit. But macroprudential and monetary policies, by sharing multiple transmission channels, may interact--and conflict--with each other. Such conflicts may represent not only an economic challenge in the pursuit of price and financial stability, but also a legal uncertainty characterizing the regulatory developments of the EU macroprudential and monetary frameworks. In analyzing the 'legal interaction' between the two frameworks in the EU, this book seeks to provide evidence of the inconsistencies associated with the structural separation of macroprudential and monetary frameworks, shedding light upon the legal instruments that could reconcile any potential policy inconsistency."-- Back cover Acknowledgments 5 Contents 6 List of Tables 8 Chapter 1: Introduction 9 1.1 Reasons for a Research 9 1.2 The Problem at Issue 12 1.3 The ‘Legal Interaction’ in a Nutshell 14 References 16 Chapter 2: Law and Economics of Macroprudential Banking Supervision 19 2.1 Defining Macroprudential Policy 19 2.1.1 Minsky and the Theoretical Foundation of the Macroprudential Dimension 23 2.1.2 The Concept of ‘Macroprudential’ in the Economic Literature 27 2.1.3 Exploring the Channels of Instability 33 2.2 Legal Components of the Macroprudential Policy Definition 36 2.2.1 Objectives of Macroprudential Policy: Deconstructing Financial Stability and Systemic Risk 37 2.2.2 The Reconstruction of Financial Stability: Insights into the Cross-Sectional Dimension of Systemic Risk 41 2.2.3 The Macroprudential Framework: Indicators, Strategies, and Tools 46 2.2.3.1 Indicators for Tracking Systemic Risks 47 2.2.3.2 Macroprudential Policy Strategies 50 2.2.3.3 The ‘Macroprudential Toolkit’ 51 2.3 The EU Regulatory Archipelago 55 2.3.1 From the de Larosière Report to Basel III 57 2.3.2 The EU Framework: CRD IV, CRR, and Pillar 2 Instruments 60 2.3.2.1 Capital-Based Macroprudential Instruments 61 2.3.2.2 Macroprudential Pillar 2 Instruments 64 2.3.2.3 The ‘CRR National Flexibility Measures’ 67 2.3.2.4 Macroprudential Liquidity Requirements 68 2.3.3 Member States’ Own Tools Outside the CRR and CRD IV 71 2.4 A European Institutional Overview 73 2.4.1 The Macroprudential Mandate in the EU 78 2.4.1.1 The ESRB: Objective and Powers 79 2.4.1.2 The Institutional Relationship Between the ESRB and the ECB 83 2.4.1.3 The Impartiality of the ESRB in View of the ECB’s Independence 86 2.4.1.4 The Macroprudential Tasks of the ESAs 88 2.4.2 National Macroprudential Responsibilities 90 2.4.2.1 The National Macroprudential Authorities and the National Designated Authorities Under the CRD and CRD IV 90 2.4.2.2 The Macroprudential Tasks of the ECB Within the Single Supervisory Mechanism 92 2.4.3 The Role of the IMF, the FSB, and the BIS 96 References 98 Chapter 3: A Legal Approach to Monetary Policy 116 3.1 Past Experiences and Main Developments in Monetary Policy 116 3.1.1 The Central Bankers’ Problem 118 3.1.2 The Critical Objective of Inflation Targeting 122 3.1.3 Concretizing Price Stability 126 3.1.3.1 The Operational Target of Monetary Policy 126 3.1.3.2 The Instruments of Monetary Policy 127 3.1.3.3 The Intermediate Variables of Monetary Policy 129 3.2 The Monetary Policy Transmission Channels in a Nutshell 131 3.2.1 The Transmission Channels: An Overview 132 3.2.1.1 Interest Rate, Exchange Rate, and Asset Price Channels 133 3.2.1.2 Credit Channels 136 3.2.2 The Dark Side of Monetary Policy Transmission: The Risk-Taking Channel 138 3.2.3 Transmission Channels Under Financial Distress 141 3.3 Price Stability, Instruments, and Monetary Transmission Mechanisms Under a Legal Perspective 146 3.3.1 Price Stability as a Legal Foundation of EU Monetary Policy 149 3.3.1.1 Price Stability as a Public Good 149 3.3.1.2 The Legal Meaning of Price Stability in the EU Framework 150 3.3.2 Testing the Monetary Policy Instruments 157 3.3.2.1 The Operational Framework: Monetary Policy Instruments 157 3.3.2.2 Targeting Monetary Policy Instruments: A Look at the Jurisprudence 161 3.3.3 Legal Uncertainties in the Concept of ‘Monetary Policy Transmission Mechanism’ 169 3.4 Monetary Policy in the Institutional Framework of the EU 172 3.4.1 Features of the European System of Central Banks 175 3.4.2 ECB and National Central Banks: Centralization or Decentralization in the ESCB? 182 3.4.3 Monetary Policy and Macroprudential Supervision in the EU: Some Preliminary Conclusions 187 References 189 Chapter 4: Policy Interactions and Conflicts 211 4.1 Interactions Between Monetary Policy and Financial Stability 211 4.1.1 An Overview of the Relevant Economic Literature 213 4.1.1.1 The Literature on the Interactions Between Monetary Policy and Macroprudential Tools 214 4.1.1.2 The Literature on Cooperation Between Monetary Policy and Macroprudential Policy 217 4.1.2 Side Effects in the Monetary Policy Transmission Channels 218 4.1.3 The Risk-Taking Channel: A Reminder 223 4.2 Interactions Between Macroprudential Policy and Price Stability 226 4.2.1 Monetary Policy Scenarios with System-Wide Capital-Based Instruments 228 4.2.2 Monetary Policy Scenarios with Liquidity Instruments 230 4.2.3 Monetary Policy and Real Estate Instruments 233 4.3 Policy Complementarities and Risk of Conflicts 236 4.3.1 Positive Complementarities When the Two Policies Work Smoothly 238 4.3.2 Negative Interactions: Misalignments and Conflicts Along the Financial Cycle 240 4.3.3 Policy Conflicts in the Eurozone? Some Brief Notes 243 4.4 Addressing the Conflicts 245 4.4.1 The Full Integration Model 246 4.4.2 The Partial Integration Model 252 4.4.3 The Independent Institutions Model 256 References 260 Chapter 5: The Legal Interaction in the EU Institutional Framework 271 5.1 Defining the Legal Interaction 271 5.1.1 Understanding the Interaction: Why ‘Legal’? 273 5.1.2 Economic Cycles and Legal Constraints 275 5.1.3 Lawmakers, Central Bankers, and the Primary Law 278 5.2 The Legal Interaction in the EU Regulatory Architecture 282 5.2.1 The Institutional Patterns of the Relevant Authorities After the Crisis 283 5.2.2 The Integration of Monetary Concerns in the Macroprudential Supervisory Decisions 290 5.2.3 The Liaison Between National Competent Authorities, Macroprudential Bodies, and Central Banks 297 5.3 Possible Conflict of Policies as a Problem of Rules? 307 5.3.1 Legal Fragmentation of the European Macroprudential Structure 308 5.3.2 The Integrated Dimension to Constrain the Crossed Effects of Monetary and Macroprudential Policies 314 5.3.3 Costs and Benefits of the EU Institutional Model 317 5.4 The Legal Limits of the ESRB 320 5.4.1 The Absence of Legal Interactions Between the ESCB and the ESRB 322 5.4.2 Can the ESRB’s Instruments Target Monetary Policy? 326 5.4.3 The General Board as the Locus of Conflict Resolution? 331 References 334 Chapter 6: Some Concluding Remarks 343 6.1 Rethinking the Interaction Between Macroprudential Supervision and Monetary Policy 344 6.2 Expanding the Array of Policy Instruments by Exploiting the Legal Interaction 347 6.3 A Cornerstone for a ‘Law and Macroeconomic’ Analysis 348 Reference 350 Glossary 351 References 354 Index 410 Front Matter ....Pages i-ix Introduction (Luca Amorello)....Pages 1-10 Law and Economics of Macroprudential Banking Supervision (Luca Amorello)....Pages 11-107 A Legal Approach to Monetary Policy (Luca Amorello)....Pages 109-203 Policy Interactions and Conflicts (Luca Amorello)....Pages 205-264 The Legal Interaction in the EU Institutional Framework (Luca Amorello)....Pages 265-336 Some Concluding Remarks (Luca Amorello)....Pages 337-344 Back Matter ....Pages 345-408