previous classes for future resilience

Keynote speech by Christine Lagarde, President of the ECB, on the farewell symposium for DNB President Klaas Knot, “Europe in the world – Challenges and Opportunities”

Amsterdam, 3 October 2025

It is a pleasure to be right here in Amsterdam.

At as we speak’s symposium, we’re saying a fond farewell to an excellent colleague and good friend. Klaas, you’ll be able to look again on a exceptional profession in public service on the nationwide, European and international ranges.

You had been on the helm of De Nederlandsche Bank for over 5,000 days.^[1] In that point, you had been a gifted communicator, conveying complicated themes to the Dutch public in clear however by no means simplistic phrases.

As a member of the Governing Council, you participated in over 330 conferences, overseen by three totally different ECB Presidents. I gained’t put you on the spot by asking you who your favorite was. You can inform me later – no stress.

Being one of many elders on the Governing Council, your voice carried a weight that helped to forge coverage consensus on the most important of moments – be it in the course of the pandemic or in the course of the sharpest inflation shock in a era.

And with expertise comes knowledge. As Chair of the Financial Stability Board (FSB), you used that knowledge to advance the worldwide agenda on monetary stability, shaping worldwide requirements and coordination.

Klaas, you’re recognized for reminding colleagues who have a tendency to speak at size to be extra “impactful” of their interventions. Well, now the stress is on me. I promise to be as “impactful” as I can.

So as we speak, I want to give attention to the 2 themes which have outlined your profession: financial coverage and monetary stability. And in so doing, I’ll talk about the highly effective position that regulation and supervision can play in lowering the potential trade-offs between them.

The interplay between financial coverage and monetary stability

Financial stability and worth stability are preconditions for one another.^[2] Yet historical past exhibits that within the pursuit of worth stability, financial coverage can face two key trade-offs with implications for monetary stability.

The first can happen when financial coverage quickly tightens. Higher rates of interest assist to curb inflation, however they will put stress on banks by eroding asset values and asset high quality, at the same time as rising web curiosity margins provide them some aid.^[3]

We noticed this in the course of the Nineteen Eighties, when the Federal Reserve quickly tightened financial coverage to convey down excessive inflation.

Combined with US deregulation within the late Seventies, which inspired riskier lending and weaker oversight, this financial tightening was one of many key elements within the emergence of the financial savings and mortgage disaster. That led to the failure of roughly 1,300 financial savings establishments owing to the maturity mismatch on their stability sheets.^[4]

The second trade-off for financial coverage can come up throughout or following an prolonged interval of financial lodging.

When inflation is beneath goal, low charges might help stimulate demand and push inflation again in the direction of goal. But in an atmosphere the place regulation is comparatively weak and particularly the place charges stay low for an prolonged interval, they will additionally encourage borrowing, risk-taking and the build-up of monetary imbalances.

These dynamics spotlight how financial coverage can have an effect on monetary stability not solely by means of banks’ stability sheets but additionally through market valuations and investor threat urge for food.^[5]

Crucially, monetary vulnerabilities might preserve constructing even after charges start to rise. We noticed this within the lead-up to the worldwide monetary disaster of 2008.

Low charges earlier within the decade fed the US credit score and housing increase that later unravelled – years after the Federal Reserve had begun to steadily tighten. And within the euro space, the sharp rise in personal debt in some international locations was a key driver of imbalances that constructed up earlier than the disaster.

The lesson for policymakers was clear. Insufficient regulation and supervision had allowed dangers to construct unchecked, leaving financial coverage as de facto the one instrument out there to confront the fallout.

This positioned an undue burden on central banks, forcing them to shoulder tasks that might have been higher managed by means of stronger safeguards within the first place. That perception powered the development of a stronger regulatory and supervisory framework after 2008.

The post-2008 regulatory and supervisory framework was a turning level for the interplay between financial coverage and monetary stability. It served as a robust lever in mitigating the trade-offs between them and, accordingly, elevated financial coverage’s room for manoeuvre.

Monetary coverage in extraordinary occasions

This was most seen throughout two extraordinary durations for financial coverage that adopted within the wake of the worldwide monetary disaster.

The first interval was when inflation was too low.

Central banks throughout superior economies turned to a set of recent – and, on the time, unconventional – instruments to satisfy their worth stability mandates, together with large-scale asset buy programmes and the introduction of damaging rates of interest.

These had been vital measures to battle a major problem. And on the time, there have been vocal issues that these measures would gasoline monetary instability.^[6] Certainly, asset costs and housing valuations did rise notably throughout this era.

But crucially, given the stronger regulatory and supervisory regime, rising asset costs did not translate into extreme leverage within the banking system. In reality, banks within the euro space deleveraged within the decade after the worldwide monetary disaster. Similarly, personal sector debt as a share of GDP additionally fell throughout that point.^[7]

And right here within the Netherlands, we noticed how macroprudential coverage acted as the primary line of defence in opposition to monetary imbalances.

Under your management, Klaas, the DNB strengthened the macroprudential framework, introducing larger capital buffers and stricter threat weight necessities to protect in opposition to housing market dangers. These measures saved in examine vulnerabilities that may as soon as have spilled over into broader monetary instability.

After years of below-target inflation, the second interval got here unexpectedly – when euro space inflation surged to report highs after the pandemic and the vitality shock sparked by Russia’s invasion of Ukraine.

In the Netherlands, for instance, inflation rose quickly, peaking simply above 17% in September 2022 – nearly six occasions the speed recorded a yr earlier.^[8]

Once once more, we confronted a rare scenario – and the ECB needed to step up. Alongside the unwinding of its asset purchases, it raised charges ten occasions by a cumulative 450 foundation factors, the quickest tightening in its historical past.^[9]

And as soon as once more, there have been issues in regards to the monetary stability implications of such a speedy tightening.^[10]

Tighter financing circumstances risked straining borrower debt service and triggering market repricing. That, in flip, might have uncovered monetary establishments to vulnerabilities from falling asset values, maturity mismatches and weaker asset high quality.

While there have been some notable financial institution failures throughout this era, the worldwide monetary system general remained broadly resilient to rising charges.

In the euro space, for instance, banks had been supported by stronger capital and ample liquidity buffers. Strong supervision additionally helped. Even earlier than the inflation shock hit in full, the Single Supervisory Mechanism had factored rate of interest dangers into its supervisory work programme.^[11]

Moreover, according to the result of its technique overview, the ECB’s Governing Council was often assessing the hyperlinks between financial coverage and monetary stability as a part of its coverage deliberations.^[12]

The expertise throughout these two financial coverage eras confirmed the teachings of 2008. Stronger regulation and supervision had been in a position to include monetary exuberance and restrict vulnerabilities. They allowed financial coverage to give attention to its job of delivering worth stability.

In this regard, Klaas, you could have a knack for good timing. When you left the Governing Council final July, inflation had fallen considerably from its historic peak and stood at our goal of two% that very same month.

A world monetary system in transformation

Does the progress we now have made in strengthening the regulatory and supervisory framework imply that policymakers can now let their guard down? The reply, in fact, is not any.

Today’s international monetary system appears to be like very totally different from the one which stood on the brink in 2008.^[13] Two key shifts stand out in contrast with then.

The first has been the huge structural transformation that has taken place, essentially the most putting change of which has been the rising footprint of non-banks in monetary intermediation.

In the euro space, non-banks – starting from funding funds and insurance coverage companies to cash market funds and securitisation automobiles – have grown from about 250% of GDP in 2008 to greater than 350% as we speak.

Non-banks are additionally extremely interconnected with the banking sector.^[14] In the euro space, banks’ asset exposures to non-banks are sizeable, averaging round one-tenth of serious establishments’ whole belongings.^[15]

At the identical time, a second key shift is changing into more and more evident – specifically, indicators of regulatory fatigue, which is creating an uneven taking part in discipline for monetary establishments.

In explicit, funding funds, regardless of their growing systemic significance, function beneath far lighter guidelines in contrast with the banking sector. That has partially helped to gasoline their progress.

One of the explanations behind this regulatory fatigue is that the post-2008 international regulatory framework has arguably been a sufferer of its personal success.

In policymaking, 17 years is a very long time. Not solely do painful recollections fade, however so too does the popularity that the monetary stability the world now enjoys is because of the robustness of that international regulatory framework established again then.

This fading sense of urgency, along with issues that banks’ competitiveness vis-à-vis non-banks is threatened by the uneven taking part in discipline, has ignited calls to revisit the prevailing set of monetary guidelines and laws.

The significance of levelling up regulation and supervision

So how ought to policymakers react to those shifts within the monetary system?

In brief, it’s critical that policymakers adapt regulation and supervision to this difficult atmosphere. They ought to achieve this not by decreasing requirements for banks, however by levelling them up for non-banks which might be concerned in bank-like actions, or with vital hyperlinks to the banking sector.

That helps to deal with banks’ issues in regards to the uneven taking part in discipline. And higher supervision of non-banks would make potential monetary stability dangers which have lain dormant in darker corners of the economic system extra seen, permitting policymakers to pre-empt them.

Klaas, as FSB Chair, you could have been a robust voice in warning in opposition to the hazards of regulatory rollback.^[16] And beneath your management, the FSB superior formidable coverage suggestions on strengthening guidelines for non-banks.

They coated cash market fund resilience^[17], liquidity mismatches in open-ended funds^[18], margin preparedness^[19] and, most just lately, leverage in non-banks.^[20] This is to not point out the FSB’s vital work on different areas of monetary stability threat.^[21]

As a central banker, I can not faux to be an unbiased observer in these discussions. Because if the regulatory and supervisory highlight had been to be broadened to non-banks, financial coverage would profit too.

If dangers had been to construct exterior the banking system, past the present attain of regulators and supervisors, the trade-offs that had been evident earlier than 2008 might re-emerge, with financial coverage de facto being the one instrument to “get in all of the cracks” and rein in monetary exuberance.^[22]

That can be a suboptimal consequence, one which probably constrains central banks’ full freedom to defend worth stability.

So as referees on the taking part in discipline, it’s critical that policymakers resist regulatory fatigue and redouble their efforts to increase stronger international guidelines to non-banks concerned in bank-like actions, or with vital hyperlinks to the banking sector.

At the identical time, after a decade of including regulation, it is a good second to take inventory and assess how regulation will be simplified to keep away from duplication and pointless burdens on monetary establishments.

In this respect, the ECB High-Level Task Force on Simplification is creating proposals for simplifying the European prudential regulatory, supervisory and reporting framework for the European Commission’s consideration.

The aim is to not loosen up guidelines, nor undo what has been achieved. Instead, the duty power is exploring how you can scale back undue complexity in chosen features of the capital construction, reporting and supervision, whereas additionally sustaining the resilience of banks and fostering better integration and harmonisation in EU frameworks.

Conclusion

Let me conclude.

I’ve spoken this night about one Dutch elder – you, Klaas. Hopefully I’ve executed so in a comparatively impactful method. But I want to end by citing one other Dutch elder.

In his Adagia, the humanist Erasmus gathered the knowledge of previous centuries for the good thing about these residing within the current. Among the proverbs that also resonate as we speak is, “Prevention is better than cure”.^[23]

In the Netherlands specifically – typically mentioned to have witnessed the world’s first monetary bubble, although historians debate its true scale^[24] – that lesson endures: vigilance is wiser than complacency.

This precept lies on the coronary heart of sound regulation and supervision. As the monetary system evolves, regulators and supervisors should retain visibility of potential dangers, since stopping instability is all the time more cost effective than repairing the harm afterwards. It additionally helps to restrict the potential trade-offs between financial coverage and monetary stability.

Policymakers mustn’t wait for an additional monetary disaster to be reminded of how excessive the stakes are. It is crucial to increase oversight to non-banks concerned in bank-like actions, or with vital hyperlinks to the banking sector – and policymakers should achieve this sooner slightly than later.

Thank you.