With the creation of the Banking Union and the launch of a new macroprudential policy framework, banking supervision in Europe has become significantly more complex than it used to be. The coexistence of micro- and macro-prudential regimes that rely on similar tools to pursue different objectives may at times give place to conflicting policy interventions. This risk is structurally higher in bank-based economies with highly concentrated banking sectors. It may be further heightened in the contractionary phase of the cycle, when policymakers face a short-run trade-off between the resilience of the financial sector and the speed of the recovery. Coordination is thus a critical issue today in the euro area. In order to deal with it, supervisors need to agree on a ranking between their policy objectives, internalise the interactions between micro and macroprudential tools, and consider the general equilibrium effects of their interventions on the economy of the area.
Piergiorgio Alessandri is research fellow at Bank of Italy. He previously worked as a Senior Economist at Bank of England. He has been visiting scholar at Norges Bank.