ECB’s Makhlouf: Need to Build Resilience in Market-Based Finance

1 March 2021

By David Barwick – FRANKFURT (Econostream) – The benefits of Europe’s macroprudential framework are already manifest and should motivate the application of such safeguards to market-based finance, European Central Bank Governing Council member Gabriel Makhlouf said on Monday.

In a speech at the Banque de France’s Financial Stability Conference, Makhlouf, who is Governor of the Central Bank of Ireland, said with respect to the experience of the pandemic that ‘on the evidence so far, and despite the effects of the shock on our communities and businesses, the core of the financial system has remained resilient, both financially and operationally.’

‘We faced an unprecedented economic crisis but we did not see the banking system amplify the economic disruption’, he added.

Makhlouf lauded market-based finance as ‘a useful alternative to bank financing [that] can facilitate risk-sharing across the financial system’, but urged that capital markets be made more resilient.

‘Policymakers must ensure that the level of resilience in market-based finance is commensurate with its contribution to systemic risk and how it interacts with the financial system and the economy as a whole’, he said. ‘Building resilience in market-based finance will ensure that the wider financial system is better placed to absorb, rather than amplify, financial shocks in times of stress.’

In the immediate aftermath of the coronavirus outbreak, market-based finance struggled with its structural vulnerabilities, with the funds sector particularly beset, he reminded.

‘The March [2020] episode highlighted that money market instruments may not be as liquid in all circumstances as investors expect’, he said. Had money market funds (MMFs) been obliged to suspend redemptions, he said, ‘liquidity stresses could have spilled over to other parts of the financial system.’

‘The interconnectedness of MMFs with other parts of the financial system – including banks and other non-banks – means their resilience in periods of stress can be systemically important’, he said.

‘[A]side from developing and operationalising the overall macroprudential framework for the market based finance sector as a whole, it is also clear that reform of the regulatory framework for MMFs is required’, he said.