ECB’s Villeroy: Entered New Phase of Extremely Rapid Asset Repricing, High Volatility on Financial Markets

2 November 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Wednesday said that economic and geopolitical uncertainty had led to a new period of financial volatility.

In a speech at the Financial System Conference in Dublin, Villeroy, who heads Banque de France, said that ‘financial stability is obviously returning to the front stage in these turbulent times, putting to the test the reforms undertaken over the last decade, but also pointing to new pockets of financial stress.’

Banking sector regulation implemented since the Great Financial Crisis allowed banks to become part of the solution during the Covid crisis by providing necessary liquidity to businesses, he said. However, safeguarding financial stability must remain a constant effort, he said, and ‘today, we are indeed facing growing concerns.’

‘We have entered a new phase of extremely rapid asset repricing and high volatility on financial markets, reflecting the uncertainty surrounding the macroeconomic and geopolitical environment’, he continued. ‘The Russian war in Ukraine casts a shadow over the economic outlook, while aggravating tensions on energy and commodity markets.’

‘The resurgence of inflation and the rising fears that it will become more entrenched is motivating central banks around the world to normalise and possibly tighten monetary policy’, he said. ‘As a result, financial conditions have tightened, and could tighten further.’

There are thus ‘rising threats to financial stability’, he said. ‘But being gloomy and excessively alarmist across the board may prove to be inaccurate and even counterproductive, and result in self-fulfilling financial distress. Our prime role as guardian of financial stability is to remain objective, vigilant, and to differentiate the various situations.’

Villeroy noted that during the period of accommodative monetary policy, macroprudential policy helped limit financial risks so that central banks could deal with persistently low inflation, posing a dilemma in the context of monetary policy normalisation.

‘If we [loosen macroprudential policy], we may contribute to the inflation dynamics through the usual credit channel’, he said. ‘If we tighten, we can contribute to triggering financial risks. Complementarity with monetary policy remains, but prudence is of the essence, and this could be the time for some macroprudential pause.’