The Advisory Scientific Committee of ESRB published a report on the risk channels associated with international financial integration for EU economies. It also provides an overview of the macro-prudential policy options that are available to address these risks. The report builds on the main insights from the rich academic literature developed recently to create a narrative of the role of global variables for the conduct of macro-prudential policy at a national level. The report reviews evidence on the cross-border spillovers of domestic macro-prudential policies. It also highlights key policy areas to make macro-prudential policy as effective as possible. Annex 1 to the report presents findings from several new research papers across the European System of Central Banks.
The report highlights that recent research supports the existence of a global financial cycle in capital flows, asset prices, and credit. The global financial cycle influences domestic financial cycles and increases the vulnerability of domestic economies to external shocks from core economies (particularly from the United States but also from China, Japan, UK and the euro area). Due to their cross-border activities, global banks play an important role as generators, transmitters, and receivers of global systemic risk. Moreover, non-bank financial institutions’ activities and interconnections have also started to influence the dynamics of the global financial cycle.
A main objective of the regulatory reform following the global financial crisis was to make global financial institutions absorb the externalities they create with their global activities. This report focuses on the macro-prudential policy implications of those activities and considers possible policy changes. The report also calls for closer monitoring of the activities of global non-bank financial institutions, particularly in terms of their interaction with global systemic risk. From the perspective of a domestic economy, existing empirical evidence points to the effectiveness of macro-prudential measures in boosting resilience to dampen the transmission of the global financial cycle to domestic economies. Additionally, increased international cooperation in the field of macro-prudential policy would address possible spillovers of these measures.
Keywords: Europe, EU, Banking, Macro-Prudential Policy, Systemic Risk, Financial Integration, Cross-Border Spillovers, Macro-Prudential Measures, ESRB
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