ECB published an occasional paper on a stocktaking exercise on the existing national approaches in EU for assessing and monitoring the effects of cross-border spillover effects of domestically oriented macro-prudential policies. The stocktaking exercise was conducted by a task force of the Financial Stability Committee (FSC) of the European System of Central Banks (ESCB). The paper accompanies an FSC report, from April 2020, that presents a framework to be used by macro-prudential authorities when assessing cross-border spillover effects induced by enacted or planned policy measures.
One of the key takeaways of this exercise is that cross-border spillover effects transmitted via the bank lending channel can be meaningful. The nature, direction, and magnitude of the spillover effects will vary both across modeling approaches and across model specifications. Most of the relevant national authorities in EU have a framework to assess and monitor cross-border spillovers from macro-prudential policies in place. As a rule, these frameworks are based on a set of indicators relying heavily on the guidance provided in the ESRB Handbook. In addition to this, several authorities incorporate results obtained from empirical models into the assessment. The majority of authorities see merit in extending the existing guidance for the assessment of cross-border spillovers.
Going forward, a significant number of authorities plan to further develop their frameworks to assess cross-border spillovers. Nine countries are planning to leverage on the existing framework and two countries plan to develop a new framework. In terms of timeline, there is limited information regarding specific deadlines to have a final version of the improved framework. Mostly, the timeline is not defined and the work will depend on available resources. The authorities that did not indicate a plan to develop a framework mainly cited an insufficient number of enacted macro-prudential policy measures as the main reason. In general, developing methodologies for assessing cross-border spillovers remains very much work in progress. The stocktake highlights the prevailing practices and individual authorities’ efforts to adjust the existing guidance to their needs or develop alternative approaches. However, limited experience with the use of these frameworks makes it difficult to critically assess their usefulness or distill best practice approaches and there appears to be a need for more guidance regarding both indicator and model-based approaches.
The stocktaking exercise indicated that enhancements to the current operational guidance should address a number of essential gaps. These include the lack of guidance on suitable models, the absence of explanation regarding the indicators, the difficulties in gathering data to compute some of the indicators, and the difficulties in mapping the indicators to the channels and the direction of cross-border effects. With respect to the most useful additional practical guidance, authorities underscored:
- The build-up of a common set of indicators and possible thresholds to assess the materiality of spillovers
- The development of structural models (empirical or theoretical) to conduct ex ante assessments and the design of a comprehensive framework ,including both indicators and models that could represent guidance on best practices
The accompanying FSC report presents an operational framework that aims to address and improve on these elements. The FSC framework provides a harmonized approach to monitoring and assessing cross-border spillover potential related to the adoption of macro-prudential measures. The FSC report provides a detailed description of the recommended operational best practice framework. The intention is that the FSC framework can serve as a starting point when assessing cross-border spillover effects of planned policy measures.
Keywords: Europe, EU, Banking, Macro-Prudential Policy, Cross-Border Spillovers, Systemic Risk, ESCB, Basel, ECB
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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