Over the last decade, central banks have implemented measures that would have been unthinkable in the past: zero or negative interest rates with unlimited monetary expansion through bank loans and direct debt purchases in the market. The exceptional nature of these measures was a consequence of the severity of a scenario dominated by the financial and economic crisis, which emphasized the risk of deflation. Financial stability thus became a priority of economic policy, with monetary policy playing a leading role, especially in Europe, where the monetary union project itself was being questioned. This objective of financial stability was clearly reflected in very low levels of volatility in the financial markets. <\/p>\n
There is an academic debate regarding the possible future consequences that the combination of highly expansionary financial conditions and low asset price volatility may entail. In recent analytical notes, both the IMF and the BIS have considered that greater market instability at this time is even desirable, as it corrects the excess of confidence or optimism toward the future that could lead to excesses and imbalances. They have undoubtedly sought to qualify the growing concern over the increase in financial volatility experienced since the beginning of the year. The question is whether this greater market instability represents a normalization in risk perception by investors or, on the contrary, reflects an increase in uncertainty with potential negative consequences for investment and consumption. <\/p>\n
Central banks acknowledge the increased geopolitical uncertainty and its possible reflection in greater market instability. However, they also remain confident in the continued economic recovery, now that the risk of deflation has passed. They are thus maintaining their strategy of monetary normalization, albeit prudently and subject to the evolution of economic data. President Draghi has argued that financial conditions must remain favorable in the near future, which is compatible with gradually phasing out the less orthodox expansionary monetary measures. The aim would be to continue supporting economic recovery in the short term while protecting financial stability in the medium and long term.<\/strong> <\/p>\n Banks are experts in managing the risks inherent to their activity. During the recent years of crisis, they have strengthened their balance sheets in terms of capital and increased liquidity. Nevertheless, authorities argue that regulation for the sector must be kept under constant review with the aim of totally eliminating any risks that may arise. However, this is not possible if, on the other hand, we want credit institutions to continue fulfilling their ultimate objective of financing growth. Precisely, the factors of vulnerability for banking activity at this time stem from the possible complacency of financial investors in the markets and international political uncertainty. Banking stability, as a prerequisite for financial stability itself, may depend in the future on eliminating the expansionary monetary measures with the greatest distorting potential, such as negative interest rates. <\/p>\n In the debate I referred to at the beginning regarding volatility, the key is not so much its level as its relationship to the stage of the economic cycle. At a mature stage of the economic and financial cycle such as the current one, it is consistent to expect an increase in financial instability, just as it is consistent for monetary normalization itself to materialize. An artificially loose monetary policy maintained for too long can only lead to greater risks in the medium term, either by generating them or by making their future materialization more severe. Complacency in risk management is never good. Banks know this very well. <\/p>\n