24 July 2026
Amid ongoing concerns over European productivity growth, this ECB Blog post looks at the relationship between macroprudential policy and productivity.
Recent years have seen rising – and well-founded – concerns over European productivity growth. As these concerns grow a suspicion emerges: is regulation to blame for the sluggish economy? This post looks at this question in the context of macroprudential regulation and argues that macroprudential policy can actually support productivity growth, by helping to prevent crises and keep credit flowing where it matters most.
Macroprudential policy is a form of regulation that focuses on the overall resilience of the financial system. The use of macroprudential policies has expanded significantly since the financial crisis of 2008. All euro area countries currently implement some form of macroprudential capital requirement for their banking system. This means that banks need to hold additional capital to make themselves resilient to shocks that affect the financial system as a whole. This is on top of what banking supervision requires of them individually. Almost all of these countries also have limits in place to curb risky mortgage lending.
Admittedly, this can come at a cost. Overly complicated or unnecessary regulation can put the brakes on banks’ ability to support the economy, which could in turn hamper productivity growth. That is why the ECB strives to improve the effectiveness of its macroprudential policies and is contributing to the simplification of Europe’s regulatory frameworks.[1] We need as little bureaucracy as possible, and as much as necessary. Simplification of financial regulation can support capital accumulation in the real economy, thereby fostering investment, productivity and job creation over the longer term. At the same time, financing innovative firms often relies more heavily on equity and venture capital than on traditional bank lending, underscoring the importance of broader capital market development.
However, policymakers have stressed that lightening the bureaucratic burden of financial regulation should not result in the loosening of financial regulation. Simplification does not mean deregulation.[2] But if deregulation could increase banks’ capacity to fund new innovative firms, then why not? Wouldn’t this boost European productivity growth?
Macroprudential policy has two main goals. Its primary goal is to build resilience in the financial system so that it can withstand crises. Its secondary goal is, where possible, to guard against the overconfidence and lack of caution typical of financial booms. Both macroprudential policy goals come with benefits for productivity growth. Financial crises have large and persistent adverse effects on long-term economic growth. By reducing the likelihood and severity of such crises, macroprudential policy also helps limit these long-lasting productivity losses. In addition to causing financial crises, financial booms can drive a misallocation of economic resources towards less productive sectors, particularly real estate. Macroprudential policy can lean against this misallocation.
Financial crises are bad for productivity growth…
As far as the first policy objective is concerned, one lesson from past crises cannot be overstated: financial crises are bad for productivity.
Financial crises are characterised by a sharp drop in the availability of credit. When banks cut their lending, firms tend to invest and innovate less and are more likely to go out of business. Growth in output per worker falls by 0.55 percentage points during the typical banking crisis.[3]
Also, the innovation that drives productivity growth is a cumulative process – inventions often build on what came before. Even when economic activity recovers, it can take a long time to regain momentum after an innovation process has been cut short. Meanwhile, high unemployment can result in the deskilling of workers. The average banking crisis entails an additional long-term 1.1% drop in output per worker for each year it lasts.[4]
For a typical five-year banking crisis, these short and long-run effects add up to an 8% total decline in output per worker.[5] To put this number in context, since the year 2000 output per worker in the euro area has grown by an average of less than 1% per year. Financial crises leave productivity scars that can take many years to heal.
Where macroprudential policies build the resilience of the financial system to this type of outcome, they can help shield productivity growth from the worst effects of financial crises. A key policy tool here are macroprudential capital buffers – such as the countercyclical capital buffer (CCyB) – which require banks to build up capital in good times so as to increase their resilience when a crisis hits.[6]
Of course we cannot just look at the benefits; we have to consider the costs as well. For example, do higher capital buffers reduce banks’ capacity to lend to (productivity-enhancing) firms in the short run? In fact, studies show that the medium-term resilience gained from macroprudential policies actually comes with limited short-term costs. The post-2021 tightening of macroprudential capital buffers in the euro area has had a minimal impact on overall credit supply by banks, with only a small number of the most capital-constrained banks cutting back on lending.[7]
…. and so are (real estate) booms
Macroprudential policy’s secondary objective can also help boost productivity. Here it should be noted that macroprudential policy does not seek to reduce credit growth in general; its goal is to guard against the excesses that tend to arise during financial booms. These typically consist of very rapid credit growth combined with a rapid rise in asset prices. We know from past experience that this combination is particularly dangerous and, unfortunately, particularly common, when the asset in question is real estate.
But why is this relevant to productivity growth? Credit and real estate booms divert valuable economic resources away from productive firms and towards less productive activities that benefit from rising house prices. In particular, during financial booms credit tends to flow to firms with appreciating tangible assets rather than to more innovative firms that would use it more productively. Indeed, previous ECB research has specifically highlighted euro area banks’ disproportionate real estate exposures, despite this sector’s limited contribution to economic growth.[8]
The literature suggests that the impact of this misallocation during financial booms is sizeable. In the run-up to the 2008 financial crisis, rising house prices increasingly diverted banks towards unproductive mortgage lending and away from productive corporate lending: a one standard deviation increase in house prices in a given region in the United States reduced local banks’ corporate lending by 42.3% and corporate investment by 20.9%.[9] During the average credit boom 70% of new credit goes to households and the less productive non-tradeable sector. And this leads to falling productivity.[10]
Misallocation can also occur within sectors: the misallocation of credit among Spanish manufacturing firms – to those that owned appreciating real estate, as opposed to productive firms – accounted for 40% of the decline in productivity in the Spanish economy between 2003 and 2007.[11] Rising real estate prices create a particularly strong disincentive for banks to lend to the innovative, R&D-intensive firms that lead productivity growth.[12] Intangible assets such as intellectual property typically make for less attractive forms of collateral than the appreciating real estate often owned by less productive firms.[13]
And what about macroprudential policy? Recent work by Nobel Prize winner Joseph Stiglitz argues that financial regulation that limits the relaxation of lending standards on real estate-collateralised loans during a financial upswing is required to mitigate this misallocation dynamic.[14] Macroprudential policymakers refer to these types of regulations as borrower-based measures (BBMs). BBMs are limits placed on banks’ mortgage lending which restrain their capacity to lend above certain risk metrics. For example, certain multiples of a borrower’s income or certain loan-to-value levels. By directly limiting banks’ capacity to shift towards risky real estate lending, these policies can help counter this misallocation. In some cases they can even limit the excessive house price growth driving the misallocation in the first place. BBMs also make both borrowers and lenders more resilient to financial downturns, thus also making severe (productivity-destroying) financial crises less likely.
Macroprudential policy helps foster a stable environment
Of course, ever-tightening macroprudential policy will not result in ever-growing productivity, and macroprudential policy should continue to be set on the basis of financial stability concerns. However, by increasing the resilience of the system to financial crises and by leaning against the misallocation of resources during financial booms, ambitious macroprudential policy can help create a stable environment. And this is good for productivity growth.
At the same time, further policy action is required to boost European productivity. For now, macroprudential policy primarily targets the banking sector. However, ECB research has highlighted the importance of non-bank financing – such as financial markets and equity investors – for funding risky innovative projects that drive productivity growth.[15] Achieving a more diversified external funding structure in Europe, including through further progress on the capital markets union, could help boost the productivity of euro area firms, which would also benefit financial stability.
Where undue complexity in the (macroprudential) regulatory framework places an undue burden on banks this should also be addressed, but it is in everyone’s interest that we maintain the resilience of the financial system while doing so.
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.
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