Renowned international experts discuss financial stability challenges of the decade at an MNB conference

25 March 2024

For the second time in two years, the Magyar Nemzeti Bank (MNB), with professional support from the Center for Latin American Monetary Studies (CEMLA) and the Official Monetary and Financial Institutions Forum (OMFIF), organised its international conference entitled 'Financial Stability Conference: turbulent times', addressing financial stability issues. During the two-day conference, renowned international speakers discussed the most important current challenges for financial stability, related to the inflation and interest rate environment, geopolitical segmentation and crisis management frameworks. The event also provided a platform for knowledge sharing on financial stability risks associated with climate change and technological developments, which are determining our future and increasingly shaping central bank decision-making.

The two-day conference brought together experts from around the world to discuss the current risks to the financial system, the short-term challenges to financial stability and its longer-term future.

In their opening speeches, Barnabás Virág, Deputy Governor of the MNB, and Manuel Ramos-Francia, Director General of CEMLA, highlighted the importance of similar knowledge sharing and summarised the global megatrends in the financial system, especially in the context of climate change and digital transition. Christopher Garnett, Senior Adviser to OMFIF, agreed with the topicality of the issues and talked about the success of the development of the Hungarian financial system.

Thorsten Beck, Director of the Florence School of Banking and Finance, delivered a keynote speech on the current state of financial stability risks and the most significant challenges facing macroprudential policy. He argued that the financial system is currently in a more resilient position to face emerging systemic risks, but that further regulatory improvement points can be identified in the area of capital and banking union, among others.

The first panel discussion addressed the financial stability implications of a high inflation and interest rate environment, and the correlations between monetary and macroprudential policy. In her presentation, Anke Weber, the IMF's Mission Chief for Hungary, argued that the regulatory framework put in place since the 2008-2009 global economic crisis has been successful in increasing the resilience of the financial system. The panel members agreed that strengthening banks' resilience to shocks and building up releasable capital buffer requirements remain a priority.

The second panel discussion of the conference focused on the increased geopolitical risks and the systemic risks posed by geo-economic and financial isolation. In his opening presentation, Stefan Thurner, President of the Complexity Science HUB Vienna, presented the potential financial stability applications of his research based on deep analysis of corporate value chains. There was a consensus among the panellists that there is currently a reversal of globalisation processes to be observed, which is reducing cross-border capital flows and may entail diverse systemic risks.

In the third session, which assessed financial stability from a historical perspective, Jorge Ponce, an expert in historical economics from the Banco Central del Uruguay, illustrated the relevance of historical processes for financial stability with various examples. According to this, financial stability crises are often the result of regulatory and supervisory gaps, excessive risk-taking, under-utilisation of financial innovation and opportunistic behaviour.

In the closing session of the first day, Dominique Laboureix, Chair of the EU Single Resolution Board (SRB), gave the opening panel presentation on the implications of international banking crises in early 2023. The European crisis management framework has basically worked well, but there are several areas where its effectiveness may be improved, which the review of the EU's crisis management and deposit insurance regulation has also set as a goal. According to the panellists, the crisis management framework is working, but it may need to be fine-tuned in the light of recent experience.

In his opening speech on the second day, Ádám Banai, Executive Director of the MNB, recalled that achieving financial stability was an important part of the Bank's objectives when the now one hundred-year-old MNB was founded, and that the global economic crisis of 2008-2009 also highlighted the importance of this from a monetary policy perspective. Over the past decade, the MNB has extensively and proactively implemented its macroprudential regulatory framework, which has allowed it to pursue price stability objectives in a stable financial system, even amidst the turbulence experienced in 2022-2023.

In the session on the financial stability implications of digital technological developments, Manuel Ramos-Francia, Director General of CEMLA, presented the turbulence related to international capital flows of global bond funds and other investment products (e.g. ETFs) that also use algorithmic trading. In his presentation, Efraim Benmelech, Professor at the Kellogg School of Management at Northwestern University, discussed the decline in the role of bank branches and the potential contribution of this process to the US banking crisis of early 2023.

In the session on the digital evolution of financial services, Leonardo Gambacorta, Head of Innovation and Digital Economy at the Bank for International Settlements, spoke about the opportunities and the wide-ranging but highly uncertain stability risks related to the rise of artificial intelligence. Ania Zalewska, Professor at the University of Leicester School of Business, presented the theory of competition between lightly regulated lenders and traditional credit institutions using innovative technologies and the risks of their business models.

In the session on Stress Testing Applications for Macroprudential Purposes, Serafín Martínez-Jaramillo, Manager of the Environmental, Social Risks Analysis and Policy Unit of the Banco de México, presented a modelling framework that is the first to combine forward-looking climate stress scenarios, pricing dependencies and network research methods to capture financial contagion. Afterwards, Bence Mérő, Senior Economic Analyst of the MNB, gave a presentation on the development of the agent-based model, which plays a key role in the impact analysis of financial stability regulations and is currently used mainly for the evaluation of housing market scenarios.

In the final session of the conference on financial risks related to climate change, Matias Ossandon-Busch, Director of Financial Stability at CEMLA, presented empirical evidence that the damage to natural capital caused by the displacement of vulnerable economic activities may lead to a contraction of local bank deposit portfolios. Changing central banking paradigms in relation to climate risks have been explored by Paola D'Orazio, Junior Professor at Chemnitz University of Technology. In the closing presentation, András Borsos, Economist at the MNB and Researcher at the Complexity Science Hub Vienna, modelled contagion effects from different carbon price shocks on a uniquely detailed network of domestic intercompany economic relations, identifying the peak points that potentially cause high banking system losses.

More information about the conference speakers is available at the event's website; the opening presentation and panel discussion may be viewed on the MNB's official YouTube channel.

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