ECB published a report that presents a best-practice framework to analyze the cross-border spillover effects of planned or enacted national macro-prudential measures. This framework by the Financial Stability Committee (FSC) of the European System of Central Banks (ESCB) is meant to serve as a starting point for national designated and competent authorities when assessing the need for reciprocity in the context of activation of macro-prudential measures. In addition to this report, ECB plans to publish an occasional paper containing a more detailed study of the existing literature on cross-border spillovers, a survey of current national approaches, and the conceptual underpinnings of the FSC framework presented in this report.
Macro-prudential policy can generate unintended cross-border spillovers, owing to regulatory arbitrage and risk management decisions by financial institutions as well as to broader trade and economic activities triggered by the activated measures. Policy instruments should, therefore, be designed to reap the benefits of positive spillovers in terms of enhanced financial stability, while seeking to limit potential negative spillovers. Thus, the analysis of cross-border spillover effects is highly relevant for assessing the overall impact of specific instruments. Overall, to support the assessments of cross-border spillover effects related to macro-prudential policy decisions in the EU, the FSC recommends the following:
- Harmonized FSC Indicator List—The list of indicators presented in this report should be the starting point, providing macro-prudential authorities within the EU with guided discretion for assessments of cross-border spillover effects of planned macro-prudential measures, as well as for ex-post monitoring of these measures. Authorities are encouraged to complement these with other indicators depending on the circumstances in their jurisdiction.
- FSC Empirical Benchmark Tool—This tool offers a basis for deeper spillover analysis. It provides authorities with a user-friendly tool, to be used at their discretion, to gauge the range of potential spillover effects from considered macro-prudential measures.
- Closing of Data Gaps—FSC has identified a number of data gaps that hamper a precise monitoring and assessment of cross-border spillover effects. Accordingly, the FSC recommends that further work be initiated to help close these gaps, also taking into account related initiatives at the ESRB level.
- Threshold values—Indicator-based approaches require well-calibrated thresholds to assess when an indicator signals material cross-border spillover effects. For the time being, FSC recommends adopting a simplified, pragmatic, percentile-based approach. However, it also recommends conducting further work on developing a fully fledged signalling approach over the medium term.
- Reciprocity—The report includes a few suggestions that could feed into subsequent discussions within FSC and ESRB. The tools and indicators provided by the FSC can inform future discussions on the appropriate intensity of reciprocity by identifying the macro-prudential instruments, for which spillovers may be most material. Furthermore, indicator-based analysis reinforces and complements the ESRB guidelines on the design and required flexibility in the use of materiality thresholds.
Keywords: Europe, EU, Banking, Macro-prudential Policy, Cross-border Spillovers, Regulatory Arbitrage, Systemic Risk, ESCB, ECB
Sam leads the quantitative research team within the CreditEdge™ research group. In this role, he develops novel risk and forecasting solutions for financial institutions while providing thought leadership on related trends in global financial markets.
Previous ArticleEC Adopts Banking Package to Alleviate Impact of COVID-19 Pandemic
EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020.
In response to questions from a member of the European Parliament, the ECB President Christine Lagarde issued a letter clarifying the possibility of amending the AnaCredit Regulation and making targeted longer-term refinancing operations (TLTROs) dependent on the climate-related impact of bank loans.
IASB started the post-implementation review of the classification and measurement requirements in IFRS 9 on financial instruments and added the review as a project to its work plan.
FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions.
EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC.
FSB published a letter from its Chair Randal K. Quarles, along with two reports exploring various aspects of the market turmoil resulting from the COVID-19 event.
RBNZ launched a consultation on the details for implementing the final Capital Review decisions announced in December 2019.
The Trustees of the IFRS Foundation, which are responsible for the governance and oversight of IASB, have announced the appointment of Dr. Andreas Barckow as the IASB Chair, effective July 2021.
HKMA issued a letter to consult the banking industry on a full set of proposed draft amendments to the Banking (Capital) Rules for implementing the Basel standard on capital requirements for banks’ equity investments in funds in Hong Kong.
ESRB published an opinion assessing the decision of Swedish Financial Supervisory Authority (FSA) to extend the application period of a stricter measure for residential mortgage lending, in accordance with Article 458 of the Capital Requirements Regulation (CRR).