ESRB published its final report on the use of structural macro-prudential instruments in the EU. It also issued an Opinion to EC with proposals on enhancing the EU legal framework for structural buffers. In the last three years, authorities have increasingly required EU banks to apply a systemic risk buffer and a systemically important institutions buffer in their own funds calculations. Based on this, ESRB has revised its Handbook and published the proposals to improve the macro-prudential toolkit.
In the final report, ESRB published its analysis of the use of structural buffers in the EU over the last three years. The structural buffers include the buffer for global systemically important institutions (G-SIIs), the buffer for other systemically important institutions (O-SIIs), and the systemic risk buffer (SRB). ESRB, in its opinion to EC, proposes ways to enhance the EU legal framework for structural buffers, which would strengthen macro-prudential policy and protect the Single Market. These policy considerations should not be understood as formal ESRB warnings or recommendations, as defined by Article 16 of the ESRB Regulation. The main proposals include:
- Substantial increase in the O-SII cap from 2% to 3%, with the possibility for designated authorities to impose buffers higher than 3%, subject to EC approval
- Substantial increase in the additional O-SII buffer cap on subsidiaries: the O-SII buffer for subsidiaries of EU parent institutions should not exceed the fully phased-in O-SII or G-SII buffer applicable to the group at consolidated level by more than 2 percentage points
- Upgrade of the SRB to the status of a dedicated instrument targeting structural systemic risk. This would require the possibility of a sectoral application of the instrument and of multiple SRB applications, to allow authorities to address distinct specific risk;
- Delineation of the SRB and O-SII buffer; structural buffers should be additive in so far as they target different systemic risks
- Simplification and clarification of the processes and improvements in transparency
Based on the experience with structural buffers and on economic analysis, additional guidance for national authorities has been included in the revised ESRB Handbook; this includes guidance on O-SII buffer calibration; a common understanding of the categories of long-term non-cyclical risks that the SRB can address; clarification of procedural aspects of SRB application; cooperation among authorities; and potential use of the leverage ratio to complement structural buffers.
Keywords: Europe, EU, Banking, Systemic Risk Buffer, G-SII, O-SII, Systemic Risk, Macro-prudential Tools, ESRB
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.
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