The European Systemic Risk Board (ESRB) will be established in January 2011 as the body responsible for the macro-prudential oversight of the EU financial system. It is mandated to actively monitor the various sources of risk to financial stability in the EU – across Member States and financial sectors – also with due consideration of global developments. It should identify the risks and assess how they could impact the financial system so as to prioritise them. In this context, systemic risk is defined in legislation on the ESRB as “a risk of disruption in the financial system with the potential to have negative consequences for the internal market and the real economy.”
The creation of the ESRB is a response to one of the key lessons of the financial crisis regarding the need for an enhanced macro-prudential oversight of the financial system as a new policy function. The value added of a macro-prudential function to safeguard financial stability is its focus on detecting, assessing and addressing vulnerabilities that arise from the interconnections between financial institutions and markets, as well as from macroeconomic and structural developments, including financial innovation. It will thus take a system-wide perspective, which will complement micro-prudential supervision, whose purpose is to assess the soundness of individual financial institutions.
The design of a framework for the conduct of macro-prudential oversight as new policy function involves significant challenges, but also represents a unique opportunity for reinforcing the arrangements to safeguard financial stability. In particular, the following three main components should underpin a macro-prudential framework:
- first, the necessary conditions for an enhanced monitoring of the financial system as a whole, in order to identify potential threats to financial stability;
- second, the instruments for translating financial stability assessments into concrete policy action aimed at enhancing the resilience of the financial system; and
- third, appropriate governance structures, including mechanisms for ensuring an effective interplay between, and coordination of, macro and micro-prudential responsibilities.
He concluded by saying that “the establishment of the ESRB will introduce a new policy function at the EU level, which has a great potential for enhancing the ability of European and national authorities to safeguard the stability of the EU’s financial system as a whole. The challenges of designing and implementing this new EU-wide macro-prudential policy function are considerable. However, with appropriate preparations, which are already ongoing in close cooperation with all the parties involved, a smooth start of the ESRB may be envisaged in 2011.”
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