Macroprudential bulletin : Issue 2 / 2016, October 2016

Macroprudential policy can comprise a broad range of issues and topics. This is clearly reflected in the second issue of the ECB's Macroprudential Bulletin. The Bulletin starts with the macroprudential effects of the EU-wide bank stress testing exercise. The first chapter of the Bulletin explains how the dynamic response of banks to macro-financial stress and the impact of intra-sector and cross-industry contagion can be captured. The results are translated into second-round macroeconomic effects arising from a shrinking of credit supply. The analysis aims to provide insights into the potential benefits of macroprudential policy measures. The second chapter of the Bulletin provides an analytical approach to gauge developments in banks' risk appetite and behaviour, which might call for targeted macroprudential policy measures if they become excessive. As risk-taking is typically not directly observable, it must be inferred from a variety of quantitative and qualitative information sets. The analysis looks at significant institutions as defined by the SSM. Finally, the last chapter looks at macroprudential regulatory issues in an attempt to shed light on the role of high-frequency quoting and dark pools. This chapter is based on two ECB research papers, one recent and another forthcoming, both of which investigate the impact of such developments on market volatility in normal and stressed times. The results also provide information on the pros and cons of potential options for regulating high-frequency trading and dark pools. The Macroprudential Bulletin ends again with an overview of recent announcements on macroprudential instruments adopted by national authorities in the euro area.