ECB published ninth issue the Macroprudential Bulletin. The bulletin provides insight into the ongoing work of ECB in the field of macro-prudential policy. ECB also published the statement of the Vice-President Luis de Guindos on the bulletin. The bulletin includes articles on key macro-prudential topics: impact of cyclical systemic risk on future bank losses, interaction between different bank liquidity requirements, effect of supervisory scrutiny on bank risk-taking, and investigating initial margin procyclicality and corrective tools using the European Market Infrastructure Regulation (EMIR) data. The bulletin provides an overview of the macro-prudential policy measures being implemented in euro area countries as on October 03, 2019.
Impact of cyclical systemic risk on future bank losses. This article studies the impact of cyclical systemic risk on future bank profitability for a large sample of EU banks, showing that high levels of cyclical systemic risk lead to large downside risks to bank profitability, with a lead time of three to five years. Hence, exuberant credit and asset price dynamics tend to increase considerably the likelihood of large future bank losses. Given the tight link between bank losses and reductions in bank capital, the results presented in this article can be used to quantify the level of “Bank capital-at-risk” (BCaR) for a banking system. BCaR is a useful tool for macro-prudential policy makers as it helps to quantify how much additional bank resilience could be needed if imbalances unwind and systemic risk materializes.
Interaction between different bank liquidity requirements. This article contributes to the discussion on the interaction of different regulatory metrics by empirically examining the interaction between the liquidity coverage ratio and the net stable funding ratio for banks in the euro area. The findings suggest that the two liquidity requirements are complementary and constrain different types of banks in different ways, similar to the risk-based and leverage ratio requirements in the capital framework. This dispels claims that one of the requirements is redundant and underlines the need for a faithful and consistent implementation of both measures (and the entire Basel III package more broadly) across all major jurisdictions, to maintain a level playing field at the global level and to ensure that the post-crisis regulatory framework delivers on its objectives.
Effect of supervisory scrutiny on bank risk-taking. This article contributes to the ongoing discussion about the long-term strategy for stress testing in the euro area. It highlights some of the strengths and weaknesses of the constrained bottom-up approach, which is being used in the EU-wide stress-testing exercise; the article shows that under this approach banks might have some scope to underestimate their vulnerabilities. The article finds that participation of banks in the stress test has an attenuating effect on their risk-taking in subsequent quarters and that this effect may partly be due to the tighter supervisory scrutiny prompted by the stress-testing quality assurance process.
Investigating initial margin procyclicality and corrective tools using EMIR data. This article contributes to the ongoing debate on the procyclicality of initial margins in derivative markets and whether the current regulatory framework sufficiently addresses this issue. While initial margin reduces counterparty credit risk in derivatives markets, there is an ongoing debate about whether efforts to limit procyclical effects of initial-margin-setting practices are sufficient. The article provides insights into this issue using European Market Infrastructure Regulation data, simulating initial margin over a long time span and evaluating the effectiveness of policy tools in reducing procyclicality. The article shows that an initial margin floor based on a standardized initial margin model could be an effective tool for reducing initial margin procyclicality.
Keywords: Europe, EU, Banking, Macroprudential Bulletin, Macroprudential Policy, Basel III, Stress Testing, Systemic Risk, Initial Margin, Liquidity Risk, OTC Derivatives, Procyclicality, ECB
Previous ArticleEC Approves Prolongation of Polish Resolution Scheme for Small Banks
EU published Directive 2021/338, which amends the Markets in Financial Instruments Directive (MiFID) II and the Capital Requirements Directives (CRD 4 and 5) to facilitate recovery from the COVID-19 crisis.
The Standing Committee of the European Free Trade Association (EFTA) recommended that a systemic risk buffer level of 4.5% for domestic exposures can be considered appropriate for addressing the identified systemic risks to the stability of the financial system in Norway.
In a recent statement, PRA clarified its approach to the application of certain EU regulatory technical standards and EBA guidelines on standardized and internal ratings-based approaches to credit risk, following the end of the Brexit transition.
In a recently published letter addressed to the G20 finance ministers and central bank governors, the FSB Chair Randal K. Quarles has set out the key FSB priorities for 2021.
EU published, in the Official Journal of the European Union, a corrigendum to the revised Capital Requirements Regulation (CRR2 or Regulation 2019/876).
ESAs published a joint supervisory statement on the effective and consistent application and on national supervision of the regulation on sustainability-related disclosures in the financial services sector (SFDR).
EC published a public consultation on the review of crisis management and deposit insurance frameworks in EU.
HKMA announced that enhancements will be made to the Special 100% Loan Guarantee of the SME Financing Guarantee Scheme (SFGS) and the application period will be extended to December 31, 2021.
EBA launched consultations on the regulatory and implementing technical standards on cooperation and information exchange between competent authorities involved in prudential supervision of investment firms.
BoE issued a letter to the CEOs of eight major UK banks that are in scope of the first Resolvability Assessment Framework (RAF) reporting and disclosure cycle.