ESRB Publishes Report on Features of Macro-Prudential Stance

The report first outlines the motivation for a framework for the macro-prudential policy stance and explains how a macro-prudential instrument is used as a policy lever by authorities for macro-prudential purposes. It then presents one potential macro-prudential stance framework that, when "operationalized," would aim to support policymakers in their assessment of risks, resilience, and implemented policies. The risk-resilience framework was chosen as the approach to the stance framework as one which fits in with the existing macro-prudential policy strategies, which could be used to take into account the many facets of macro-prudential policy and which could potentially be developed further. Next, the report focuses on the measurement of the macro-prudential stance and discusses the interactions and aggregation of various stance components, also outlining challenges related to macro-prudential policy objectives, macro-prudential instruments, and the relationship between the two. Finally, the report presents next steps and concludes that the risk-resilience framework has been considered appropriate to utilize as the foundation for the macro-prudential stance assessments. 

In the report, it has been proposed that the assessment of the macro-prudential stance and policy action is a two-tier process, with the stance assessment of implemented policy measures being separate from the assessment of costs and benefits of potential adjustments to macro-prudential policy. It is envisaged that the work on the conceptual aspects of the macro-prudential stance framework would be further developed into an operational framework over the medium term. Macro-prudential authorities could use such a framework when conducting their assessment of risk and resilience and analyzing the appropriateness of their macro-prudential responses. This would require the development of a quantitative concept that is transparent and flexible enough to allow and encourage implementation by national authorities.

The second phase of the work on the macro-prudential stance may advance the concepts of the Growth-at-Risk model, the use of stress testing, and the understanding of the aggregation of stances. In addition, as with all applications of policy, efficient and effective communication is critical to successful implementation; therefore, further efforts could be made in determining the best approach to communicating decisions made after a macro-prudential policy stance assessment. The next step to further develop the presented concepts requires cooperation among the ESRB membership and ESRB working groups. It is envisaged that the "operationalization" of the macro-prudential stance framework will have a significant positive impact on the progression and understanding of macro-prudential policy across Europe.

Related Link: Report (PDF)

Keywords: Europe, EU, Banking, Risk-Resilience Framework, Systemic Risk, Macro-Prudential Policy, Financial Stability, ESRB