Discussion of “Monetary Policy, Macroprudential Policy, and Banking Stability: Evidence from the Euro Area”∗

The staggering economic and social costs left behind by the near collapse of the global financial system in the autumn of 2008 have led to much soul searching among economists. What were the factors that contributed to the massive buildup of risks and imbalances in the financial system in the years prior to the 2007–09 financial crisis—many of which went undetected or were poorly understood at the time—is a question of immense importance in both academic and policy circles and one that will occupy our profession for many years to come. Contemporary narratives of forces that roiled financial markets in recent years (Brunnermeier 2009 and Gorton 2009) have identified the following main culprits: (i) a growing tendency of banks to repackage loans and pass them on in the form of securitized products to other investors—the so-called originate-to-distribute model—which allowed banks to off-load risks from their balance sheets; and (ii) a move by banks to finance their asset holdings with shorter-term maturity instruments, which left them vulnerable to the drying up of funding liquidity. These two factors, along with investors’ enormous appetite for securitized products in the years