ESRB Chair Remarks on Development of Macro-Prudential Policy in Europe
The ECB President and the ESRB Chair Mario Draghi spoke at the fourth annual conference of ESRB, in Frankfurt, about progress in the development of macro-prudential policy during the past eight years. He added that, over the past eight years, the implementation of macro-prudential policy in Europe has substantially improved and ESRB has played a valuable role in facilitating that process. However, the overall framework for macro-prudential policy in Europe remains incomplete and progress is needed in terms of better analytical tools, new instruments to counter the development of risk outside the banking sector, and a clearer framework to govern policy actions.
Mr. Draghi outlined the following areas of further progress in macro-prudential policy:
- Analytical tools. Developing the analytical toolkit to adequately monitor inter-connectedness and contagion requires granular datasets, along with the ability to map and link data across entities and markets. Only a holistic view of the system will allow potential contagion channels to be identified and modeled; this requires investing in new technologies for data analytics and enhancing the capacity for authorities to link and share data and technical knowledge.
- Instruments to counter risks outside the banking sector. Mr. Draghi emphasized the need to broaden the range of macro-prudential instruments beyond those currently available, which focus almost exclusively on the banking sector. For the insurance sector, the contours of such instruments are taking shape. They include solvency instruments such as symmetric capital requirements for cyclical risks, liquidity instruments for insurers with a vulnerable liquidity profile, and instruments to target bank-like activities to ensure that macro-prudential policy is consistent across sectors.
- Framework to govern policy actions. He believes that such a framework would facilitate communication with market participants and the general public as well as help mitigate any risk of inaction bias. In contrast to the monetary policy framework, the framework that governs macro-prudential policy interventions is much less developed. Developing the policy framework is challenging and will take time. The ESRB approach uses the concept of residual risk, which is the difference between the level of risk and the current resilience of the financial system. In setting up the framework, policymakers need to establish the level of residual risk that they consider acceptable. Regular macro-prudential policy decisions would then follow a two-stage process. Policymakers assess the level of residual risk in the system and, if that diverges from the acceptable level, they then assess the policy tightening or loosening required to realign it.
Related Link: Speech
Keywords: Europe, EU, Banking, Insurance, Macro-Prudential Policy, Systemic Risk, Contagion Risk, Big Data, ECB, ESRB
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Blake Coules
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Previous Article
IMF Publishes Reports on 2019 Article IV Consultation with DenmarkRelated Articles
APRA Sets LAC for D-SIBs, Proposes to Enhance Crisis Preparedness
APRA issued a letter on the loss-absorbing capacity (LAC) requirements for domestic systemically important banks (D-SIBs) and published a discussion paper, along with the proposed the prudential standards on financial contingency planning (CPS 190) and resolution planning (CPS 900).
EC to Review Macro-Prudential Rules while ESRB Assesses Policy Stance
The European Commission (EC) launched a call for evidence, until March 18, 2022, as part of a comprehensive review of the macro-prudential rules for the banking sector under the Capital Requirements Regulation (CRR) and Directive (CRD IV).
FSB Sets Out Good Practices for Crisis Management Groups
The Financial Stability Board (FSB) published a report that sets out good practices for crisis management groups.
APRA Penalizes Heritage Bank for Incorrect Reporting of Capital
The Australian Prudential Regulation Authority (APRA) found that Heritage Bank Limited had incorrectly reported capital because of weaknesses in operational risk and compliance frameworks, although the bank did not breach minimum prudential capital ratios at any point and remains well-capitalized.
OSFI Releases Annual Report 2021-2022
The Office of the Superintendent of Financial Institutions (OSFI) released the annual report for 2020-2021.
OSFI Updates Timeline for Implementation of Certain Basel Rules
Through a letter addressed to the banking sector entities, the Office of the Superintendent of Financial Institutions (OSFI) announced deferral of the domestic implementation of the final Basel III reforms from the first to the second quarter of 2023.
EC Defers Adoption of Regulatory Standards for Disclosures Under SFDR
EIOPA recently published a letter in which EC is informing the European Parliament and Council that it could not adopt the set of draft regulatory technical standards for disclosures under the Sustainable Finance Disclosure Regulation (SFDR) within the stipulated three-month period, given their length and technical detail.
FCA Releases MIFIDPRU Application Forms and Third Set of Rules on IFPR
The Financial Conduct Authority (FCA) published the third in a series of policy statements that set out rules to introduce the UK Investment Firm Prudential Regime (IFPR), which will take effect on January 01, 2022.
APRA Finalizes Capital Adequacy Standards for Banks
The Australian Prudential Regulation Authority (APRA) published, along with a summary of its response to the consultation feedback, an information paper that summarizes the finalized capital framework that is in line with the internationally agreed Basel III requirements for banks.
CPMI-IOSCO Seek Comments on Access to Central Clearing and Portability
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued a consultative report focusing on access to central counterparty (CCP) clearing and client-position portability.
