The European Systemic Risk Board has been one of the guardians of financial stability in Europe for more than a decade. Much has been achieved in its first decade, however the framework must evolve to meet new challenges.
This column discusses a comprehensive set of proposals
developed by the ESRB to adapt the EU macroprudential framework to the
challenges of the next decade. These aim to make the financial system
more resilient, and for a more consistent, forward-looking, proactive,
and countercyclical use of macroprudential instruments, while reducing
complexity in the legal framework.
Macroprudential policy has helped better assess and address
systemic risks within the financial system in a way that complements
microprudential policy’s mitigation of individual institutions’ risks. Before
the global financial crisis, “few supervisors, if any, could see the
wood for all the trees and nor did they see that the woods were
connected across borders” (Ingves 2021). Macroprudential policy has
since then been operationalised in the EU through the ESRB (ESRB 2011,
2014b). The ESRB has helped significantly improve our understanding and
analysis of sources of systemic risk within the financial system as a
whole, ranging from the real estate sector (e.g. ESRB 2022b) to the
insurance sector and investment funds. It has helped improve the quality
and availability of supervisory data (e.g. ESRB 2016b) and supported
the implementation of European-wide stress testing of the banking
sector. Furthermore, it has been at the forefront of developing analysis
of new financial risks related to climate change and cyber risk, for
example proposing, as early as 2016, that climate risk stress tests be
implemented (ESRB 2016a).
Since 2014, the EU Capital Requirements Directive and
Regulation has provided a macroprudential toolkit, enabling authorities
to address both cyclical and structural systemic risks (ESRB
2014a). Microprudential reforms improved the resilience of EU banks
through higher capital requirements, better quality of capital and
higher liquidity buffers. The implementation of complementary
macroprudential tools has further enhanced the resilience of the EU
banking sector against systemic risks. For example, systemically
important banks must hold additional capital, thus helping to address
the too-big-to-fail problem (FSB 2021). Due to the combined micro- and
macroprudential capital requirements, banks’ median ratio of Common
Equity Tier 1, i.e. ‘hard capital’, to risk-weighted assets increased
from around 13% at the beginning of 2014 to 17% in mid-2021 (Figure 1)....
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Figure 1 Common Equity Tier 1/risk-weighted assets ratio of banks in the EU
(percentages, interquartile range and median, latest observation Q4 2021)
Source: ESRB Risk Dashboard (2022).
CEPR/Vox
© CEPR - Centre for Economic Policy Research
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