Monetary policy in a banking union

The ECB going green: Impact on the interrelationship between monetary policy and banking supervision?

“…Central banks which are in charge of both tasks could be captured by 'financial dominance', whereby preference is given to financial stability rather than to price stability. 22 Financial dominance occurs, for example, when the central bank keeps interest rates low in order to protect underperforming banks from getting into trouble, even if raising the interest would be required for the sake of price stability. The possibility of 'misuse' of supervisory competences with a view to monetary policy objectives has been raised as well: when monetary policy solicitates for credit expansion and more risk-taking by commercial banks, the central bank might be tempted to adapt its supervisory tools to this end.…”

Safeguarding the Euro as a Currency Beyond the State

“…The realisation of this promise demands sound public and private finances in each and every participating country in addition to appropriate regulation and supervision of the financial sector. As pointed out by Richter (2013), the ECB as a monetary policy institution could hardly be expected to assume on its own the responsibility for securing this dual stability in its function as lender of last resort (see also Linzert and Smets, 2015). The main reason is that the 'non-standard' stabilisation measures that become necessary in a crisis have major implications for both resource allocation and income distribution, and therefore require a political decision.…”

“…EMU is however still characterised mostly by bank-based rather than market-based corporate financing and banks are also the basic source of credit for consumers. A sound, safe and integrated euro area banking system is therefore essential for cross-border private risk sharing in bank credit markets, a smooth transmission of monetary policy and for financial stability throughout the eurozone (Linzert and Smets, 2015). The short-term political focus has been on breaking the pernicious feedback loop between fragile systemic banks and their vulnerable governments in a crisis, an issue to which the steps towards a European Banking Union offered a partial solution.…”