(Adds details on ECB link, quotes.)
FRANKFURT, June 23 The European Central Bank
will start to hold regular meetings with the European Union's
new bank supervisor to keep a closer eye on risks to financial
stability, ECB Vice President Vitor Constancio said on Monday.
Historically low interest rates and unconventional monetary
polices to support economic recoveries with "too low rates of
inflation" are causing some markets to overheat, Constancio
warned. Among them is real estate, whose boom in the early 2000s
helped set the stage for the financial crisis.
"Right now, the low nominal growth requires low interest
rates, and this creates the possibility of activating 'the
risk-taking channel' and search for yield, and restrictive
macro-prudential measures become necessary," Constancio said in
a speech at an ECB research conference.
Coordinating the two functions of monetary policy and
macro-prudential policy would help control future risks.
Consequently, the ECB Governing Council and the Supervisor Board
of the Single Supervisory Mechanism (SSM) will hold regular
"It is a decision by the Governing Council to have these at
least quarterly meetings with the Supervisory Board of the SSM
to discuss macro-prudential issues," Constancio told reporters
on the sidelines of the conference.
PREVENTION BETTER THAN CURE
Constancio emphasised that in matters of financial
instability, prevention is always better than cure.
"The crisis showed that the amount of risk endogenously
generated by a financial cycle spinning out of control dwarfs
the 'mopping up' ability of fiscal and monetary policy, due to
fiscal capacity limits and the zero lower bound on nominal
interest rates," he said.
The global economy is slowly emerging from the financial
crisis after massive interventions by major central banks, which
cut interest rates close to zero. In the case of the United
States, Japan and Britain, they also flooded the market with
liquidity by buying large amounts of assets.
This has driven up prices for some assets, such as property
, as investors search for higher returns and are increasingly
willing to take on more risk.
The issue has grabbed the attention of international
organisations. The International Monetary Fund urged Britain
earlier this month to cool its housing market by reining in
risky mortgages, and in its financial stability report in May,
the ECB warned about growing imbalances.
"The ECB's and the IMF's financial stability analyses
confirm that specific asset segments, among which (are) real
estate, point to some overheating in some countries," Constancio
said. "The issue then arises as to whether macro-prudential
policy needs to react."
In the last quarter, he said, Belgium, the Netherlands,
Slovenia and Estonia had activated macro-prudential policies -
capital-related measures aimed at managing systemic risk in the
(Reporting by Eva Taylor; Editing by Larry King)