(Finance) – “During the years of low inflation, monetary policy encouraged risk-taking as part of its monetary policy transmission mechanism. Moreover, the same central banks have underestimated the possibility of a return to high and persistent inflationwhich has influenced our monetary policy actions and shaped the expectations of businesses, households and investors,” he said Isabel Schnabel, which sits on the Executive Board of the European Central Bank (ECB), during an event in London. “Central banks need to think about how these factors may have contributed to theaccumulation of financial fragility“, he added.
In the current situation, given the resilience of euro area banks, “President Lagarde rightly underlines that there is no compromise between price stability and financial stability – he continued – The ECB can continue to do whatever it takes to bring inflation back to our 2% target in a timely manner”.
According to Schnabel, in the long run “the weakening of bank profitability could expose the persistent problem of theexcessive debt in the united euro area lack of mergers pan-European banking institutions, a problem that the ECB cannot solve on its own”.
Therefore, the changing interest rate environment “can provide a new impetus for one of the most important steps of European integration: the completion of the European banking union“.
According to the German economist, governments and supervisors are essential to allow monetary policy makers to focus on their primary mandate of price stability. “Sound financial regulation and supervision are the better protection against financial dominancejust as a functioning fiscal framework is needed to protect against fiscal dominance”.
This “argues in favor of maintaining or strengthening the capital reserves macro-prudential, of prudence on profit distributions and gods buybacks of treasury shares and closing regulatory gaps, including through full implementation of the Basel III reforms,” Schnabel said.