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
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ECB finalized the guide on assessment methodology for the internal model method for calculating exposure to counterparty credit risk (CCR) and the advanced method for own funds requirements for credit valuation adjustment (A-CVA) risk.
EBA published an Opinion addressed to EC to raise awareness about the opportunity to clarify certain issues related to the definition of credit institution in the upcoming review of the Capital Requirements Directive and Regulation (CRD and CRR).
APRA is consulting on updates to ARS 210.0, the reporting standard that sets out requirements for provision of information on liquidity and funding of an authorized deposit-taking institution.
FED released hypothetical scenarios for a second round of stress tests for banks.
PRA published updates in relation to the 2021 Supervisory Benchmarking Portfolio exercise.
FED adopted a proposal to extend for three years, with revision, the capital assessments and stress testing reports (FR Y-14A/Q/M; OMB No. 7100-0341).
HKMA revised the Supervisory Policy Manual module CR-G-14 on margin and other risk mitigation standards for non-centrally cleared over-the-counter (OTC) derivatives transactions.
EBA issued a revised list of validation rules with respect to the implementing technical standards on supervisory reporting.
EBA published its response to the call for advice of EC on ways to strengthen the EU legal framework on anti-money laundering and countering the financing of terrorism (AML/CFT).
NGFS published a paper on the overview of environmental risk analysis by financial institutions and an occasional paper on the case studies on environmental risk analysis methodologies.