In cooperation with the Dutch and Swedish central banks (De Nederlandsche Bank and Sveriges Riksbank), the Bundesbank hosted an international conference on macroprudential topics. This year’s event in Eltville am Rhein addressed issues such as interest rate risk, capital buffers for banks and non-standard monetary policy. Among the speakers and participants were Ryozo Himino and Vasileios Madouros, the Deputy Governors of the Bank of Japan and the Bank of Ireland, respectively, together with former Reserve Bank of Australia Governor Philip Lowe and high-ranking representatives of the ECB and the Single Resolution Board (SRB). They were joined by professors from the University of Chicago, the University of Oxford, Stanford University and the London School of Economics. The keynote speaker was Tobias Adrian of the International Monetary Fund (IMF).

Capital buffers prevent crises

Mr Adrian highlighted the crucial role played by banks’ sufficient capital buffers when it comes to the resilience of the financial system, explaining that a more stable loan supply can be assured through the capital buffers that banks can deploy during a crisis. According to the IMF senior official, banks should build up buffers not only during periods of strong credit growth, but also during normal periods. This would enable them to withstand various shocks, he said, before describing the impact of the coronavirus pandemic as an example. Banks in countries where such requirements were already in place before the pandemic therefore had a capital buffer at the start of the pandemic that supervisors were able to release. Mr Adrian remarked that, during the pandemic, these countries then benefited from the fact that banks were able to keep their loan supply stable on account of the released capital.

© Walter Vorjohann

The discussion following the presentation centred on the reasons why some countries have already introduced the buffers. It was determined that an economy’s volatility and openness, but also the government’s budgetary latitude, all play a role. 

Global differences in interest rate risk

Another topic covered at the conference was how to tackle interest rate risk. Participants discussed how interest rate risk is captured conceptually and how sensitive banks’ various business areas are to interest rate changes. Another key topic was the diverse range of experiences across the world over the past two years. Although interest rates in the United States and Europe rose at a similar pace during this period, it was only in the United States that bank failures were observed. By contrast, European banks coped well with the interest rate increases. Reasons for this could be that European banks hedge their interest rate risk more heavily in the financial markets and that, in Europe, Basel III regulation was tightened for all banks, not just for particularly large ones. 

Dealing with stressed banks

© Walter Vorjohann

Participants also spoke in depth about the difficulties faced by banking supervisors in dealing with stressed banks. While such institutions still comply with supervisory requirements, it is likely that this will no longer be the case in the foreseeable future. Many participants believed that major supervisory interventions could be warranted with a view to prevention – legally, though, this is only possible to a certain extent as long as a bank is complying with the rules. The discussion showed that there are clear differences between countries in how they deal with banks, especially on this issue. 

Monetary policy at the long end

The experts also discussed a specific form of non-standard monetary policy, namely a longer-term interest rate rule. Amongst other things, the central banks of Japan and Australia set out a longer-term interest rate target during periods of low inflation rates. Participants discussed the fact that, in both countries, there were repeatedly periods in which the markets were not entirely convinced by this target. During these phases, both central banks had to purchase bonds to defend their interest rate target. Participants also spoke about differences between the two countries. 

Next year will see the ninth macroprudential conference take place in Amsterdam. It is expected to focus on topics such as geopolitical risks and the threat of cyberattacks to financial stability.