Macroprudential policy and financial stability

Financial stability

The ECB monitors developments in the banking sectors of the euro area and the EU as a whole, as well as other financial sectors, to identify any vulnerabilities and check the resilience of the financial system.

It carries out these tasks together with the other central banks of the Eurosystem and the European System of Central Banks.

The emergence of possible systemic risks in the financial system is addressed through macroprudential policies. The overarching goal of macroprudential policy is to preserve financial stability.

Macroprudential policies aim to:

  • prevent the excessive build-up of risk, resulting from external factors and market failures, to smoothen the financial cycle (time dimension)
  • make the financial sector more resilient and limit contagion effects (cross-section dimension)
  • encourage a system-wide perspective in financial regulation to create the right set of incentives for market participants (structural dimension)

Definition of financial stability

“Financial stability is a condition in which the financial system – comprising of financial intermediaries, markets and market infrastructures – is capable of withstanding shocks and the unravelling of financial imbalances, thereby mitigating the likelihood of disruptions in the financial intermediation process which are severe enough to significantly impair the allocation of savings to profitable investment opportunities”.

Financial Stability Review