ECB published a report that presents a best-practice framework to analyze the cross-border spillover effects of planned or enacted national macro-prudential measures. This framework by the Financial Stability Committee (FSC) of the European System of Central Banks (ESCB) is meant to serve as a starting point for national designated and competent authorities when assessing the need for reciprocity in the context of activation of macro-prudential measures. In addition to this report, ECB plans to publish an occasional paper containing a more detailed study of the existing literature on cross-border spillovers, a survey of current national approaches, and the conceptual underpinnings of the FSC framework presented in this report.
Macro-prudential policy can generate unintended cross-border spillovers, owing to regulatory arbitrage and risk management decisions by financial institutions as well as to broader trade and economic activities triggered by the activated measures. Policy instruments should, therefore, be designed to reap the benefits of positive spillovers in terms of enhanced financial stability, while seeking to limit potential negative spillovers. Thus, the analysis of cross-border spillover effects is highly relevant for assessing the overall impact of specific instruments. Overall, to support the assessments of cross-border spillover effects related to macro-prudential policy decisions in the EU, the FSC recommends the following:
- Harmonized FSC Indicator List—The list of indicators presented in this report should be the starting point, providing macro-prudential authorities within the EU with guided discretion for assessments of cross-border spillover effects of planned macro-prudential measures, as well as for ex-post monitoring of these measures. Authorities are encouraged to complement these with other indicators depending on the circumstances in their jurisdiction.
- FSC Empirical Benchmark Tool—This tool offers a basis for deeper spillover analysis. It provides authorities with a user-friendly tool, to be used at their discretion, to gauge the range of potential spillover effects from considered macro-prudential measures.
- Closing of Data Gaps—FSC has identified a number of data gaps that hamper a precise monitoring and assessment of cross-border spillover effects. Accordingly, the FSC recommends that further work be initiated to help close these gaps, also taking into account related initiatives at the ESRB level.
- Threshold values—Indicator-based approaches require well-calibrated thresholds to assess when an indicator signals material cross-border spillover effects. For the time being, FSC recommends adopting a simplified, pragmatic, percentile-based approach. However, it also recommends conducting further work on developing a fully fledged signalling approach over the medium term.
- Reciprocity—The report includes a few suggestions that could feed into subsequent discussions within FSC and ESRB. The tools and indicators provided by the FSC can inform future discussions on the appropriate intensity of reciprocity by identifying the macro-prudential instruments, for which spillovers may be most material. Furthermore, indicator-based analysis reinforces and complements the ESRB guidelines on the design and required flexibility in the use of materiality thresholds.
Keywords: Europe, EU, Banking, Macro-prudential Policy, Cross-border Spillovers, Regulatory Arbitrage, Systemic Risk, ESCB, ECB
Sam leads the quantitative research team within the CreditEdge™ research group. In this role, he develops novel risk and forecasting solutions for financial institutions while providing thought leadership on related trends in global financial markets.
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