Macroprudential Policy Implementation in Europe
Session 1: Macroprudentialpolicy – ultimate objective and institutional framework
Francesco Mazzaferro and Tuomas Peltonen
17-19 October 2018Contributions by Jarn Denijs, Frank Dierick and
Stéphanie Stolz are gratefully acknowledged
1. Ultimate objective of macroprudential policy
1. Systemic risk
2. Ultimate objective
2. Institutional framework
1. The European System of Financial Supervision
2. Mandate and powers of the ESRB and the ECB
3. Operationalising the framework
Overview
2
1. Ultimate objective of macroprudential policy
1. Systemic risk
2. Ultimate objective
2. Institutional framework
1. The European System of Financial Supervision
2. Mandate and powers of the ESRB and the ECB
3. Operationalising the framework
Overview
3
Ensure financial stability
Characteristics of a stable financial system (Schinasi, 2004)
o Financial resources are being efficiently and smoothly reallocated from savers
to investors
o Financial risks are being assessed and priced reasonably accurately and they
are being efficiently managed
o Financial shocks can be comfortably absorbed
European Central Bank (Financial Stability Review, preface)
“… a condition in which the financial system – comprising of financial
intermediaries, markets and market infrastructures – is capable of withstanding
shocks and the unravelling of financial imbalances, thereby mitigating the
likelihood of disruptions in the financial intermediation process which are severe
enough to significantly impair the allocation of savings to profitable investment
opportunities.”
Objectives of macroprudential policy
4
Prevent and mitigate systemic risk
ESRB (EU Regulation No 1092/2010, Art. 2, 2010)
“Systemic risk means a risk of disruption in the financial system with the potential to
have serious negative consequences for the internal market and the real economy.”
• Time dimensionReflects cumulative (procyclical) risk build-up in financial system with
- excessive risk exposure in boom phase and
- excessive risk aversion in bust phase,
accompanied by high volatility in leverage and maturity mismatch
• Cross-sectional dimensionReflects distribution of risk in financial system at given point in time depending
on
- size and concentration of financial institutions
- interconnectedness of activities (direct and indirect linkages) covering risks of
contagion
Objectives of macroprudential policy
5
European Systemic Risk Board (2014)
“The ultimate objective of macroprudential policy is to contribute to the
safeguarding of the stability of the financial system as a whole. This includes
strengthening the resilience of the financial system and decreasing the
build-up of vulnerabilities, thereby ensuring a sustainable contribution of the
financial sector to economic growth.”
Objectives of macroprudential policy
6
1. Ultimate objective of macroprudential policy
1. Systemic risk
2. Ultimate objective
2. Institutional framework
1. The European System of Financial Supervision
2. Mandate and powers of the ESRB and the ECB
3. Operationalising the framework
Overview
7
The European System of Financial Supervision
European Systemic Risk Board
(ESRB)
European Banking Authority
(EBA)
European Insurance and Occupational Pensions Authority
(EIOPA)
European Securities and Markets Authority
(ESMA)
Joint Committee
National microprudential
supervisory authorities
European Central Bank
(ECB)
National macroprudential authorities
Microprudential supervision Macroprudential supervision
Following de Larosière report (2009), ESRB established end-2010 as part of the
European System of Financial Supervision.
8
• ESRB was created in 2010 as part of the European System of Financial
Supervision.
• ESRB includes EU central banks, supervisors, ESAs, EC, EFC.
• ESRB General Board as a decision making body
• ESRB Chair: Mario Draghi (President European Central Bank)
• ESRB Vice-Chair: Mark Carney (Governor Bank of England / Chair of Financial Stability
Board)
• ESRB ATC Chair: Philip Lane (Governor of Central Bank of Ireland, Trinity College)
• ESRB ASC Chair: Richard Portes (London Business School)
• ESRB Secretariat as a think tank
• The ESRB Secretariat (hosted by the ECB) provides analytical, policy & administrative
support to the ESRB
• Analysis supported by the ESRB members incl. ECB and conducted by working groups
and task forces
The ESRB – bringing together policy makers in Europe
9
The ESRB – mandate and powers (Regulation No 1092/2010
or ESRB Regulation)
10
• Mandate:
– Prevention or mitigation of systemic risks to the stability of the
EU financial system that could damage the real economy
– Smooth functioning of the internal market thereby ensuring that
financial sector fosters sustainable economic growth
• Scope: Macroprudential oversight of the entire EU financial
system
Contrast to euro-area banking focus of the ECB
• Soft law tools: ‘warnings’ and ‘recommendations’ to authorities
and Member States in the EU . ‘Act or explain’
Contrast to ‘topping-up’ powers of ECB in banking
• Information hub and coordination role
The ECB – mandate and powers
11
Monetary and prudential policies at the ECB
• Notification obligation of national authorities (Art. 5.1)
– Notification by the national authority to the ECB of its intention to
adopt a macroprudential measures under the CRD/CRR
– ECB can object against the intended measure
– The national authority should duly consider the ECB’s reasons
before proceeding with its decision
• Topping-up power of the ECB (Art. 5.2 and 5.3)
─ Possibility to apply higher capital buffers or more stringent measures
─ National authority may also propose to the ECB to act as such
The ECB – mandate and powers (Art. 5 of Regulation No
1024/2013 or SSM Regulation)
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The ECB – mandate and powers
13
Preparation of macroprudential policy decisions at the ECB
European Systemic Risk Board (ESRB) Single Supervisory Mechanism (SSM)
Year of creation
2010
(together with European Supervisory
Authorities, i.e. EBA, EIOPA, ESMA)
2014
Broader context
Created together with European
Supervisory Authorities, i.e. EBA, EIOPA,
ESMA
Banking Union
MembershipCentral banks, plus ECB, EC, ESA,
national supervisorsNational banking supervisors
Location Hosted by the ECB
Notification/coordination mechanism
national measures vis-a-vis
ECB as macroprudential authority
Geographical
coverage28 EU countries 19 EA countries
Sectoral
coverageAll financial sectors Banking sector
Powers Warnings and recommendationsTop-up powers for instruments in
CRDIV/CRR package
Common
objectives
Coordination among members
Harmonisation of approaches
Focus on country and cross-country dimension
EU/euro area (EA) coordination of macroprudential policies
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• Information hub:
– ESRB database of national macroprudential measures:
https://www.esrb.europa.eu/mppa/html/index.en.html
– Review of macroprudential policy in the EU (annual publication):
https://www.esrb.europa.eu/pub/pdf/reports/esrb.report180425_review_
of_macroprudential_policy.en.pdf?a46dda84af956ff7fbc10fbfbf8491c8
• Coordination role:
– Various coordination roles given in Union law
– Two important coordination frameworks:
• Framework for reciprocation within the EU
• Framework for recognising and setting countercyclical capital buffer rates in
3rd countries
The ESRB – information hub and coordination role
15
• Flagship Report and Handbook on Macroprudential policy in
the Banking Sector
• Three recommendations on the macroprudential framework:
• Recommendation on the macro-prudential mandate of national
authorities (ESRB/2011/3):
• Recommendation on intermediate objectives and instruments of
macroprudential policy (ESRB/2013/1):
• Recommendation on guidance for setting countercyclical capital
buffer rates (ESRB/2014/1)
• Strategy paper on macroprudential policy beyond banking
The ESRB – part in developing and operationalising
macroprudential policy frameworks in the EU
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• Recommendation on the macroprudential mandate of
national authorities (ESRB/2011/3):
A. Objective
• Contribute to safeguarding the stability of the financial system as a whole
• Ensure that national macroprudential policies can be pursued
B. Institutional arrangements
• Single institution or board
• Leading role of central bank
• Cooperation and information exchange arrangements
C. Tasks, powers, instruments
• Identifying, monitoring and assessing financial stability risks / implementing
macroprudential policies
• Power to require relevant data, also outside the regulatory parameter
• Designation of / surveillance approaches for systemically important elements of the
financial system
• Control over appropriate instruments to achieve its objectives
Developing the policy framework – mandate
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D. Transparency and accountability
• Policy decisions and motivations are made public in timely manner
• Power to make public and private statements about systemic risk
• Publication of macroprudential strategies
• Accountability to national parliament
• Legal protection when acting in good faith
E. Independence
• At the minimum operationally independent
• Organisational / financial arrangements should not jeopardise conduct of
macroprudential policy
Developing the policy framework – mandate
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• Almost all Member States have now a macroprudential authority in place
• Key role of central banks
• Two dominant models: central bank or committee
• Mandate also covers the beyond banking sector
Developing the policy framework – mandate
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Type of macroprudential authority and designated authority
Source: ESRB.
Notes: Designated authority refers to the authority responsible for setting the CCyB rate (Article136 of Directive 2013/36/EU).
• Recommendation on intermediate objectives and
instruments of macroprudential policy (ESRB/2013/1):
A. Intermediate objectives
• 5 intermediate objectives
B. Macroprudential instruments
• Available instruments should allow pursuing ultimate objective and intermediate
objectives
• Legal framework that allows for direct control of instruments or recommendation
power
C. Policy strategy
• Need to define a macroprudential strategy
• Need to inform ESRB prior to the use of instruments in case of significant cross-
border effects
Developing the policy framework – intermediate objectives
and instruments
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D. Periodical evaluation of intermediate objectives and instruments
• Periodically assess the appropriateness of the intermediate objectives and make
changes when necessary
• Periodically review `the effectiveness and efficiency of the instruments and inform
rthe elevant authority in case legal changes are needed to introduce new instruments
E. Single market and Union legislation
• Need for a coherent set of instruments covering the whole financial system
• Need for mechanisms that allow an efficient interaction between Union institutions
and Member States
• Sufficient flexibility for national authorities to activate those instruments whenever
needed, while preserving the single market
Developing the policy framework – intermediate objectives
and instruments
21
Developing the policy framework – intermediate objectives
and instruments
22
Developing the policy framework – intermediate objectives
and instruments
23
Intermediate objective Indicative instruments
Excessive credit growth
and leverage
• Countercyclical capital buffer
• Sectoral capital requirements
• Macroprudential leverage ratio
• Loan-to-value (LTV), loan-to-income (LTI) ratios
Excessive maturity
mismatch and market
illiquidity
• Macroprudential adjustment to liquidity ratio
• Macroprudential restrictions on funding sources
• Macroprudential unweighted limit to less stable funding
(e.g. loan-to-deposit or LTD ratio)
• Margins and haircuts requirements
Exposure concentration • Large exposures restrictions
• Clearing requirement for central counterparties (CCPs)
and management of clearing exceptions
Misaligned incentives • Capital surcharge for systemically important institutions
(SIIs)
Resilience of financial
infrastructure
• Margins and haircuts requirements
• Increased disclosure
• Structural systemic risk buffer
Developing the policy framework – intermediate objectives
and instruments
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Source: Macroprudential database ESRB.
Notes: Chart only includes measures which were still active on the 1st of October 2018 and which were considered substantial. An active measure is a measure
which has not been discontinued; updated measures are only counted once. All measures are deemed to be substantial apart from measures of a more procedural
or administrative nature, such as the early introduction of the capital conservation buffer and exempting small and medium-sized investment firms from the capital
conservation buffer. The figure also does not include the CCyB because it is set periodically.
Developing the policy framework – setting of CCyB rates
25
• Recommendation on guidance for setting CCyB rates
(ESRB/2014/1):
A. Principles
1. Objective of the buffer
2. Buffer guide
3. Risk of misleading information
4. Release of the buffer
5. Communication
6. Recognition of buffer rates
B. Guidance on credit-to-GDP gap, benchmark buffer rate and buffer
guide
C. Guidance on variables indicating the build-up of system-wide risk
associated with excessive credit growth
D. Guidance on variables indicating that the buffer should be
released
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