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    ESRB Report Reviews Macro-Prudential Policy in EU

    July 01, 2021

    ESRB published a report that examines developments in the macro-prudential policy framework in EU during 2020. The report notes that the key source of systemic risk in EU stems from the negative impact of the pandemic on economic activity and the resulting rising solvency pressures in the private sector. The report highlighted that banks have benefited from a variety of support measures but are facing deteriorating asset quality. Looking ahead, public support measures will need to shift from a defense of the pre-pandemic status quo to more targeted solutions that help viable companies to adjust to the post-pandemic world. Phasing out across-the-board measures is particularly warranted when these delay the recognition of loan losses.

    The report also noted that policies could also attach higher importance to addressing the debt burden of viable but overindebted firms. Furthermore, member states should review and improve collateral enforcement procedures and strengthen the capacity of the judiciary to avoid bottlenecks. A swift adoption of the proposed EU Directive on credit servicers, credit purchasers, and the recovery of collateral (2018/63) would be helpful in simplifying extrajudicial collateral enforcement, reducing the cost of non-performing loan (NPL) resolution and removing obstacles for NPL sales to specialized credit purchasers. The negative impact of a further increase of provisions on bank capital also compounds the need to step up efforts to achieve higher operational efficiency, including through consolidation. To address the imminent challenges, banks need to recognize and provision for new NPLs early on and enhance their internal NPL management and resolution capacity. To ensure sufficient credit supply throughout the crisis, banks’ capital buffers need to be usable for banks to continue financing the economy and absorb losses, and macroprudential authorities have started discussing the lessons to be drawn from the impact of the COVID-19 crisis on the buffer framework.

    In addition, ESRB has published its annual report, which describes its risk assessment and contributions to the macroprudential policy framework over the period April 01, 2020 to March 31, 2021. ESRB also published an issues note on money market funds, which sets out the ESRB’s analysis of systemic vulnerabilities in MMFs and preliminary policy considerations on how to reform MMFs. ESRB will further analyze a range of issues, including the wider markets in which MMFs operate, the behavior and expectations of investors in MMFs, as well as the structure of MMFs and the liquidity management tools available to them, with a view to adopting a Recommendation by the end of 2021. Finally, ESRB released its quarterly risk dashboard at its June Board meeting.


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    Keywords: Europe, EU, Banking, Systemic Risk, COVID-19, Macro-Prudential Policy, Residential Real Estate, Credit Risk, NPLs, Risk Dashboard, Annual Report, Money Market Funds, Guarantee Scheme, ESRB

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