The financial stability reviews produced by the Bundesbank and other central banks have become a well-established tool – for policymakers, the financial sector and the general public, Bundesbank President Joachim Nagel said at an event held by the Bundesbank in Frankfurt am Main to mark the 20th anniversary of the Financial Stability Review. At the event, Bundesbank Executive Board member Michael Theurer, Chair of the Supervisory Board of the ECB Claudia Buch, and representatives from supervisory authorities, academia and banking discussed the challenges facing financial stability. 

Financial stability reviews as an early warning system

The crises of the 1990s demonstrated how quickly financial stability can be forfeited. Partly in response to this, central banks around the world started paying more attention to analysing and monitoring risks to financial stability once more: The introduction of financial stability reviews was a significant milestone,” Professor Nagel said. The Bank of England was an international pioneer, publishing its debut Financial Stability Review in 1996. The Bundesbank followed suit in 2005. “From then on, the Financial Stability Reviews served as an early warning system for the public and as a platform for analysing risks.

Mandate for a stable financial system

According to Professor Nagel, these warnings often went unheeded up until the global financial crisis. That crisis became the catalyst for a fundamental re-anchoring of financial stability at the institutional level. For example, in May 2009, the Bundesbank established a dedicated Directorate General Financial Stability. When the Financial Stability Act (Finanzstabilitätsgesetz) entered into force in 2013, an official mandate for financial stability was bestowed upon the Bundesbank – together with the Federal Financial Supervisory Authority (BaFin) and the Federal Ministry of Finance – for the first time. Since then, the three institutions have come together regularly in the form of the German Financial Stability Committee (G-FSC).

The Bundesbank President continued that the global financial crisis had led to far-reaching institutional adjustments at the international level, too. For instance, the Financial Stability Board was created in 2009 to strengthen international cooperation and the monitoring of systemic risks. The European Systemic Risk Board (ESRB) set to work monitoring the European financial system and limiting systemic risk in 2010. Nowadays, financial stability is an integral part of central banks’ mandate, stressed Professor Nagel.

Forward-looking policy is crucial

Since the global financial crisis, we have achieved a great deal together at the international level, emphasised Michael Theurer, the Bundesbank Executive Board member responsible for the area of financial stability. The most important milestones included, for example, the improved own funds requirements for banks and the newly introduced capital buffers. According to Theurer, however, the absence of a global financial crisis in recent years should not create a false sense of security. Events such as the banking turmoil in the United States and Switzerland in spring 2023, or the latest developments surrounding the US tariff announcements, show that the situation in the financial markets remains uncertain. Geopolitical tensions and new technological developments are presenting persistent challenges. It is crucial that we continue to pursue and enhance our forward-looking policies while taking a holistic view of the financial system.

Important communication tool in uncertain times

According to Theurer, the Financial Stability Review is an important communication tool for central banks, especially in today’s risk environment: It helps us to raise awareness among the general public, financial intermediaries and other relevant actors, to create trust and to lay the foundation for informed decisions. Especially in uncertain times, communication can curb excessive risk appetite and promote financial stability by highlighting risks, providing guidance, and thus reducing uncertainty. Uncertainty is unavoidable. But we can – and want to – help find ways to deal with it.

Dialogue about risk

At the event, participants discussed which risks were currently present in the financial system as well as what implications these had for central banks, supervisory authorities and market participants. These risks included, amongst others, the challenges in supervising non-bank financial intermediaries such as investment funds, which are now interconnected with one another across national borders. New risks to banks arising from artificial intelligence, cyber risks and quantum computing were also at the focus of the discussion.

Participants additionally discussed how it was possible to quantify geopolitical risks using stress test data as well as what data were needed to capture new risks. Claudia Buch stressed that geopolitical risks would have an impact through traditional channels, in particular. The ECB recently published a framework for categorising these risks.

Looking back at the history of the Financial Stability Review, the speakers highlighted how the risk environment had changed over the past 20 years and what impact this has had at the institutional level. Operational risks and the non-bank sector were already topics in the 2005 Financial Stability Review. Today, according to the participants, risks also include cyber risks arising from innovations such as stablecoins, amongst others. The speakers further discussed how the topic of financial stability had gained in importance worldwide following the global financial crisis. Since then, forward-looking analysis and prevention have been at the focus of macroprudential supervision, with cooperation between national, European and international institutions playing a key role.

Video of the conference