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
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.
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