ESRB Issues Papers on LEI and Macro-Prudential Policy Design
The European Systemic Risk Board (ESRB) published two occasional papers: one paper explores a potential application of the empirical growth-at-risk approach for design of macro-prudential policies while the other discusses the importance of the Legal Entity Identifier (LEI), particularly its role in monitoring systemic risk. The paper on LEI provides background material for Recommendation ESRB/2020/12, which intends to facilitate the implementation of the EU legal framework to uniquely identify legal entities engaged in financial transactions via an LEI and to make its use in supervisory reporting and public disclosures systematic.
Paper on LEI. The paper describes the importance of a unique identifier of legal entities to financial stability and explains why the LEI is the identifier of choice and presents the state of play of its implementation. Next, the paper sets out the advantages of a globally defined LEI for the two different types of user, namely public authorities and the wider financial and non-financial industry. It also discusses the limitations on expanding the use of the LEI, which include costs involved with LEI uptake, the existence of similar identifiers used by local, national or regional authorities rather than globally, the use of LEI outside the financial sector, and the lack of legal requirements for the use of LEI. The paper then outlines and discusses two possibilities to address these shortcomings: having the LEI issued by national business registers at the time of business entity registration and having the LEI issuance facilitated by banks. Finally, the paper provides empirical evidence of the advantages of using the LEI in two member states, namely Germany and France. The experience gained in member states in using the LEI is expected to be crucial for implementing the recommendation.
Paper on macro-prudential policy design. The paper explores a potential application of the empirical growth-at-risk approach to the assessment and design of macroprudential policies. It studies how macro-prudential policy could be designed and evaluated using a linear-quadratic social welfare criterion that rewards expected GDP growth and penalizes the gap between expected GDP growth and growth-at-risk. It shows that, in specific environments, this welfare criterion can be micro-founded as consistent with expected-utility maximization under risk-averse preferences for GDP levels. The main challenges for the applicability of this framework are more empirical and political than conceptual. On the political side, once data and estimation provide a reliable description of the policy trade-offs, the main challenge will be to define society’s aversion for financial instability on which optimal policies should be based. Additionally, given the uncertainty surrounding the relevant parameters implied by the empirical challenges, policymakers may need to be guided on how to expand the type of framework sketched in this paper to account for model uncertainty (that is, for the imperfect knowledge of the specification and parameters of the relevant quantile regressions) and the potential policy mistakes that could stem from this uncertainty.
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Keywords: Europe, EU, Banking, Insurance, Securities, LEI, Systemic Risk, Macro-Prudential Policy, Growth-at-Risk, ESRB
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