‘European financial system is critically important for the prosperity and stability of European and global economies’ Governor Lane

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• European financial system faces structural challenges
• Financial institutions must adjust to the new post-crisis regulatory environment
• Macroprudential policy interventions could be deployed to attenuate national credit cycles

The European financial system currently faces myriad cyclical and structural challenges, according to the Governor of the Central Bank of Ireland, Philip Lane. 

Speaking at European Financial Forum today, Lane said “At a European level, the legacy effects of the financial crisis and the European sovereign debt crisis mean that many sectors are focused on the repair of over-leveraged balance sheets, while there is an open debate about the likely duration of the current environment in which both policy rates and long-term interest rates are at historically low levels”.

The Governor highlighted the need for financial institutions to adjust to the new post-crisis regulatory environment and respond to the new challenges and opportunities provided by technological innovations.

He said that an integrated European financial system can foster deeper and more liquid financial markets, generate scale economies in the production of financial services and improve competition across financial institutions. 

“These potential gains provide strong motivation for the European Commission’s proposals for Capital Markets Union. While offering many benefits, deeper cross-border financial integration, in both bank and non-bank sectors, carries several risks which require monitoring, and maybe even some new policy tools. 

“Asymmetric shocks across countries may trigger procyclical international debt flows, with households and firms in faster-growing countries tempted to borrow more, funded by outflows from slower-growing countries. If such flows become excessive, these may act as a destabilising force, as experienced by Ireland and Spain in the mid-2000s,” he said. 

He also said that while some of the risks would be shared by foreign investors under conditions of banking and capital market union, macroprudential policy interventions can also be deployed to attenuate national credit cycles.  Examples include loan-to-value and debt-to-income limits on mortgages (as introduced in Ireland in early 2015) and the activation of the new system of countercyclical capital buffer charges on banks.