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
FSC Discusses Improvements to LAT for IFRS 17 ImplementationRelated Articles
NGFS Updates Address Short-Term Climate Scenarios and Transition Plans
The Network for Greening the Financial System (NGFS) is exploring the development of short-term climate scenarios to complement its existing scenario framework of long-term climate scenarios.
ISSB Updates Address ESG Issues while IASB Consults on Impairments
The International Sustainability Standards Board (ISSB) is seeking feedback, until August 09, 2023, on the exposure draft that sets out the methodology proposed by ISSB to amend the Sustainability Accounting Standards Board (SASB) Standards' metrics
OSFI to Review Liquidity Adequacy Guidelines and Policy Architecture
The Office of the Superintendent of Financial Institutions (OSFI) is consulting, until June 21, 2023, on a review of the liquidity treatment provided in the Liquidity Adequacy Requirements (LAR) Guideline for wholesale funding sources with retail-like characteristics.
ESRB Publishes Report on Cryptos and DeFi; ECB Updates on Digital Euro
The European Systemic Risk Board (ESRB) published a report that outlines the systemic implications of crypto markets and proposes policy options to address the risks stemming from crypto-assets and decentralized finance or DeFi.
EU Agencies Issue Updates on DORA, ESAP, and Crowdfunding Regulation
The European Supervisory Authorities (ESAs) published a discussion paper on their joint advice to the European Commission (EC) on proposals to specify criteria for critical information and communication technology (ICT) third-party service providers
ESAs Propose ESG Disclosure on STS Securitization, Issue Other Updates
The Joint Committee of the three European Supervisory Authorities (ESAs) proposed to amend the Implementing Regulation 2016/1799 on the mapping of External Credit Assessment Institutions' (ECAIs) credit assessments.
UK Authorities Issue Updates, Finalize Policy on Model Risk Management
The Prudential Regulation Authority (PRA) finalized the model risk management principles for banks, the policy statement PS5/23 on risks from contingent leverage, and PS4/23 on moving senior managers regime forms from the PRA Rulebook.
APRA Revises Implementation Timeline for Operational Risk Standard
The Australian Prudential Regulation Authority (APRA) updated the implementation date of the new cross-industry prudential standard CPS 230 on operational risk management
BCBS Consults on Basel FAQs and Amendments, Issues Other Updates
The Basel Committee on Banking Supervision (BCBS) published a report assessing implementation of the global Basel standards on net stable funding ratio (NSFR) and large exposures (LEX) in South Africa
EBA Announces Multiple Regulatory and Reporting Updates in April 2023
The European Banking Authority (EBA) published consultations on the amendments to the guidelines on risk-based anti-money laundering and countering the financing of terrorism (AML/CFT) supervision
