Featured Product

    ESRB Report Advises to Address Risk of Lowering Lending Standards

    June 01, 2021

    ESRB published a report that examines the macro-prudential policy implications of the prolonged low interest rate environment in EU and proposes possible policy actions to mitigate the identified issues. One of the conclusions of the analysis is that the current macro-prudential toolkit does not provide instruments to deal directly with risks related to structural changes in the financial system. Development of a macro-prudential policy beyond banking and more activity-based regulation are required to complement the current entity-based regulation. The report recommends enhancing the AnaCredit data collection and identifies implementation and monitoring of lending standards across financial system as one of the key actions to complete the policy framework.

    The analysis identified four areas of concern stemming form the low interest rate environment: profitability and resilience of banks, indebtedness and viability of borrowers, systemic liquidity risk, and sustainability of the business models of insurers and pension funds. The report notes that addressing these risks requires wide-ranging macroprudential policy responses. The report sets out a range of policy options for mitigating systemic risks and improving systemic risk analysis and notes that ESRB will continue to develop appropriate policy responses. The report identifies that key actions are needed in the following areas to complete the policy framework, as outlined in the 2016 ESRB report on the macro-prudential policy issues arising from low interest rates and structural changes in system: 

    • Implementation and monitoring of lending standards across the financial system
    • Sustainability of the business models of insurance companies and pension funds offering longer-term return guarantees
    • Monitoring of leverage in the financial system and analysis of interconnectedness
    • Identification of regulatory arbitrage and subsequent analysis of the need for activity-based regulation

    To improve systemic risk analysis, the proposal is to build an enhanced credit and debt monitoring capacity for indebtedness and viability of borrowers. Under this, ECB should consider extending AnaCredit, as already envisaged as part of further development stages, to include aggregated statistical information on households and nonprofit organizations serving households. Future data collection should ideally include not only bank lending but also non-bank lending and other forms of debt. Another proposal is to improve liquidity reporting and use already available data more efficiently and implement system-wide liquidity stress tests for systemic liquidity risk. Moreover, in recent years, banks in EU have increased lending volumes and are moving toward exposures with higher credit risk by increasing their lending exposures to commercial real estate, consumer lending, and small and medium enterprises (SMEs) to compensate for the decline in net interest margins, leading to a relatively stable level of net interest income. In this context, the report proposes the following key missing actions to address the risk of a lowering of lending standards across the financial system:

    • ESRB should foster the implementation of a minimum harmonized set of borrower-based measures (that is, LTV/DSTI/DTI) and lending standards (that is, affordability tests, amortization rules, maturity limits, and collateral valuation principles) for households at the EU level. These measures could be part of the Mortgage Credit Directive and the Consumer Credit Directive as well as the 2022 review of the macro-prudential tools (as required by Article 513 CRR) and would remain the responsibility of national macro-prudential authorities.
    • All national macro-prudential authorities should be legally empowered to activate a minimum harmonized set of tools to limit the extent of systemic risks arising from the relaxation of lending conditions, especially in the context of mortgage lending. In the absence of an EU-wide framework, national competent authorities should implement national frameworks.
    • ESRB and the national competent authorities should monitor the risks posed by lending beyond banking. Enhanced credit/debt monitoring capacity could be created on the basis of existing credit registers and could be improved by linking it to relevant survey data. ESRB should support the implementation of monitoring and lending standards beyond banking at the national level and should advise national competent authorities to guarantee data availability.

     

    Related Links

    Keywords: Europe, EU, Banking, Credit Risk, Systemic Risk, Liquidity Risk, AnaCredit, Lending Standards, Reporting, Mortgage Credit Directive, Consumer Credit Directive, ESRB

    Featured Experts
    Related Articles
    News

    UK Authorities Consult on Implementation of Basel 3.1 Standards

    The UK authorities have published consultations with respect to the Basel requirements for banks. The Prudential Regulation Authority (PRA) published the consultation paper CP16/22 on rules for the implementation of Basel 3.1 standards.

    November 30, 2022 WebPage Regulatory News
    News

    ESAs Issue Multiple Regulatory Updates for Financial Sector Entities

    The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.

    November 15, 2022 WebPage Regulatory News
    News

    FSB and NGFS Publish Initial Findings from Climate Scenario Analyses

    The Financial Stability Board (FSB) and the Network for Greening the Financial System (NGFS) published a joint report that outlines the initial findings from climate scenario analyses undertaken by financial authorities to assess climate-related financial risks.

    November 15, 2022 WebPage Regulatory News
    News

    FSB Issues Reports on NBFI and Liquidity in Government Bonds

    The Financial Stability Board (FSB) published a letter intended for the G20 leaders, highlighting the work that it will undertake under the Indian G20 Presidency in 2023 to strengthen resilience of the financial system.

    November 14, 2022 WebPage Regulatory News
    News

    ISSB Makes Announcements at COP27; IASB to Propose IFRS 9 Amendments

    The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.

    November 10, 2022 WebPage Regulatory News
    News

    IOSCO Prioritizes Green Disclosures, Greenwashing, and Carbon Markets

    The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.

    November 09, 2022 WebPage Regulatory News
    News

    EBA Finalizes Methodology for Stress Tests, Issues Other Updates

    The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups

    November 09, 2022 WebPage Regulatory News
    News

    EU Finalizes Rules Under Crowdfunding Service Providers Regulation

    The European Union has finalized and published, in the Official Journal of the European Union, a set of 13 Delegated and Implementing Regulations applicable to the European crowdfunding service providers.

    November 08, 2022 WebPage Regulatory News
    News

    OSFI Sets Out Work Priorities and Reporting Updates for Banks

    The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.

    November 07, 2022 WebPage Regulatory News
    News

    APRA Finalizes Changes to Capital Framework, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.

    November 03, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8597