ABSTRACT
Following the financial crisis, a new theoretical framework in which monetary policy aims at price stability and macro-prudential policy at financial stability is presented. In 2014, the European institutions established the Single Supervisory Mechanism (SSM) to pursue the objective of financial stability. The new institutional arrangement contemplates a micro-prudential policy under the direct control of the European central bank (ECB), a macro-prudential policy under the responsibility of National Competent Authorities (NCAs) and the supervision of the ECB. The chapter presents a survey and a simple analytical model to assess this new institutional design. Despite a still incomplete reform process, as the decision-making process lacks total transparency and the regulatory field is not levelled, the survey supports the view that the SSM promotes financial stability in the Euro area. According to the model presented, the new institutional framework is positively assessed: an increase in the efficiency of prudential policies to face financial risks allows the ECB to pursue the objective of financial stability without compromising output stability. As highlighted by Carlo Panico, this occurred in the Mexican economy, where the process of financial liberalisation promoted a rise in systemic risk, and the monetary policy aimed at financial stability generated lower growth.
