Financial Dominance: Not an Immediate Danger

Financial dominance describes a situation in which a central bank does not dare to tighten its policy stance as this would threaten the stability of the financial system. The danger of this happening is limited at present. The banking system is well capitalised. Private credit has not expanded much, not even during the COVID-19 recession in most euro area countries – except in France. However, in some countries, the financial sector remains highly exposed to sovereign debt. "Indirect financial dominance" could thus easily arise if sovereign risk premia return. Continuing asset purchases under the PEPP increases the danger of fiscal dominance. This paper was provided by the Policy Department for Economic, Scientific and Quality of Life Policies at the request of the committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 27 September 2021.