The authors for the papers that make up the SUERF studies have highlighted certain reccommendations, based on four different aspects of financial stability, summarised below.
On prudential supervision concepts and practice, micro-prudential and macro-prudential supervision was compared to the supervision of an airplane. Each part of an airplane must be monitored regularly but it is also crucial to monitor the whole aircraft and its ability to fly, which depends on the interaction of all parts. Authorities with responsibility for respectively macro and micro issues should be under one roof, as is the case in De Nederlandsche Bank. The responsibility for financial stability should be anchored in legislation. A stronger legal backing is needed both at EU level and the national level. The mutual understanding between micro and macro experts needs to be strengthened.
On bringing in systemic risk considerations into financial regulation and supervision, there is argument against proposals to limit the size of individual institutions and to narrow the scope of bank activities per institution. Narrow banking would imply loss of synergy and lead to a financial environment in which non-banks develop even further and uncontrolled and unsupervised risks spread even more. Public intervention should be neutral, with it being left to the market forces to shape the structure and scope of the business activities of individual firms. The core issue is to strengthen risk management in especially systemic institutions in order to limit the probability of their failure. We should refrain from introducing another capital adequacy yardstick than the present Basel II risk-based minimum capital charge. Public authorities should not determine when a capital buffer should be built-up. The size of buffers should be based on individual banks’ internal models and specific portfolio composition. Banks could be required to have a capital buffer based on recessionary parameters. Data requirements could be extended to cover past recession periods and the sources of systemic risk should be managed within the present risk-based prudential regulation and supervision framework.
As regards the Quest for Financial Stability in Europe, an important lesson to be learned from the 2007-2009 financial crises has been that coordination among European countries is wanting. Present crisis arrangements are primarily national based. Coordination works when the interests of the national governments are aligned. If national interests diverge, coordination breaks down. There is a need to put crisis management at a European footing. In addition, there is a need to upgrade macro-prudential supervision in the European Union.
Finally, on the issue of offering assistance to financial institutions in distress, the authors compare the interventions by the Federal Reserve System, Bank of England and European Central Bank and the implications of these interventions for the central banks themselves. In the period from August 2008 until December 2008, the balance sheets of the central banks more than doubled in total. They explain to what extent special loan facilities contributed to the growth and structural changes of the balance sheets in the three central banks. The Fed has emerged as being the most aggressive of the three central banks and has accepted large risk exposures related to uncollateralized loans and corporate securities.
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