ESRB published a report that examines the macro-prudential policy implications of the prolonged low interest rate environment in EU and proposes possible policy actions to mitigate the identified issues. One of the conclusions of the analysis is that the current macro-prudential toolkit does not provide instruments to deal directly with risks related to structural changes in the financial system. Development of a macro-prudential policy beyond banking and more activity-based regulation are required to complement the current entity-based regulation. The report recommends enhancing the AnaCredit data collection and identifies implementation and monitoring of lending standards across financial system as one of the key actions to complete the policy framework.
The analysis identified four areas of concern stemming form the low interest rate environment: profitability and resilience of banks, indebtedness and viability of borrowers, systemic liquidity risk, and sustainability of the business models of insurers and pension funds. The report notes that addressing these risks requires wide-ranging macroprudential policy responses. The report sets out a range of policy options for mitigating systemic risks and improving systemic risk analysis and notes that ESRB will continue to develop appropriate policy responses. The report identifies that key actions are needed in the following areas to complete the policy framework, as outlined in the 2016 ESRB report on the macro-prudential policy issues arising from low interest rates and structural changes in system:
- Implementation and monitoring of lending standards across the financial system
- Sustainability of the business models of insurance companies and pension funds offering longer-term return guarantees
- Monitoring of leverage in the financial system and analysis of interconnectedness
- Identification of regulatory arbitrage and subsequent analysis of the need for activity-based regulation
To improve systemic risk analysis, the proposal is to build an enhanced credit and debt monitoring capacity for indebtedness and viability of borrowers. Under this, ECB should consider extending AnaCredit, as already envisaged as part of further development stages, to include aggregated statistical information on households and nonprofit organizations serving households. Future data collection should ideally include not only bank lending but also non-bank lending and other forms of debt. Another proposal is to improve liquidity reporting and use already available data more efficiently and implement system-wide liquidity stress tests for systemic liquidity risk. Moreover, in recent years, banks in EU have increased lending volumes and are moving toward exposures with higher credit risk by increasing their lending exposures to commercial real estate, consumer lending, and small and medium enterprises (SMEs) to compensate for the decline in net interest margins, leading to a relatively stable level of net interest income. In this context, the report proposes the following key missing actions to address the risk of a lowering of lending standards across the financial system:
- ESRB should foster the implementation of a minimum harmonized set of borrower-based measures (that is, LTV/DSTI/DTI) and lending standards (that is, affordability tests, amortization rules, maturity limits, and collateral valuation principles) for households at the EU level. These measures could be part of the Mortgage Credit Directive and the Consumer Credit Directive as well as the 2022 review of the macro-prudential tools (as required by Article 513 CRR) and would remain the responsibility of national macro-prudential authorities.
- All national macro-prudential authorities should be legally empowered to activate a minimum harmonized set of tools to limit the extent of systemic risks arising from the relaxation of lending conditions, especially in the context of mortgage lending. In the absence of an EU-wide framework, national competent authorities should implement national frameworks.
- ESRB and the national competent authorities should monitor the risks posed by lending beyond banking. Enhanced credit/debt monitoring capacity could be created on the basis of existing credit registers and could be improved by linking it to relevant survey data. ESRB should support the implementation of monitoring and lending standards beyond banking at the national level and should advise national competent authorities to guarantee data availability.
Keywords: Europe, EU, Banking, Credit Risk, Systemic Risk, Liquidity Risk, AnaCredit, Lending Standards, Reporting, Mortgage Credit Directive, Consumer Credit Directive, ESRB
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