macroprudential policy implementation in europe session 1: … · 2018-10-15 · macroprudential...

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

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1. Systemic risk






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

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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


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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.”


6


1. Systemic risk






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.

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• 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

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The ESRB – mandate and powers (Regulation No 1092/2010

or ESRB Regulation)

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• 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

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https://www.esrb.europa.eu/mppa/html/index.en.html

https://www.esrb.europa.eu/pub/pdf/reports/esrb.report180425_review_of_macroprudential_policy.en.pdf?a46dda84af956ff7fbc10fbfbf8491c8

• 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


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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


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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


and instruments

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and instruments

22


and instruments

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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


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

macroprudential policy implementation in europe session 1: … · 2018-10-15 · macroprudential...

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