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08 December 2021

Commissioner McGuiness: 'The ESRB at 10 years – key achievements and future challenges': keynote address at the 5th ESRB annual conference

Since Brexit, the EU depends too heavily on third-country CCPs, an issue that has also been analysed in depth by the ESRB. We need to expand the EU's own clearing capacity to safeguard financial stability in the medium-term.

I would like to start by thanking President Lagarde for inviting me to speak at today’s event.

I often say that I am the EU Finance Commissioner.

But my full job title is Commissioner for financial services, financial stability and Capital Markets Union.

Financial stability is in my job title and it’s at the core of my role.

We really notice the value of financial stability during periods of instability, such as the global financial crisis, which saw bank runs, companies going bankrupt and soaring unemployment.

After that crisis, we realised we needed better systems in place to safeguard financial stability.

Financial stability needs individual institutions to be well managed, but we also need to look at the financial system as a whole, understand how all the different parts fit together, and how that system connects to the real economy.

To give us that full view, we set up the European Systemic Risk Board, and entrusted it with the macro-prudential oversight of the EU financial system.

Alongside the three European Supervisory Authorities, the ESRB plays a key role in preventing and mitigating systemic risk.

And the ESRB demonstrated its value during the Covid-19 pandemic, mobilising its expertise to help prevent the health crisis – and resulting economic shock – from leading to financial instability.

Following some market turmoil in March 2020, the financial system has done well, thanks to swift fiscal, monetary and regulatory policy relief from governments and public authorities.

So after a successful first 10 years, today I want to focus on what the next decade might look like for the ESRB, and the priorities for the next ten years.

[Preventing the next crisis]

[Abrupt asset price correction]

While we did a good job maintaining financial stability during COVID, we need to address growing vulnerabilities. Some of these started building before the pandemic.

In particular, low interest rates have led to rising asset prices and made high levels of debt affordable.

And COVID has caused debt levels in the non-financial corporate and public sectors to rise rapidly. 

High levels of debt reduce resilience to future shocks, and high asset valuations mean there is the risk of sudden price corrections.

The ESRB now sees an abrupt correction of asset prices as the greatest threat to financial stability.

It is not just financial assets that have become more vulnerable to a price correction. In most EU countries, house prices are also rising fast.

Banks are in a better position to cope with a shock in the real estate sector than they were before the global financial crisis.

But clearly, this is something we will need to keep a close eye on.

And I look forward to the ESRB’s forthcoming analysis of vulnerabilities in residential real estate.

What about a major correction in the prices of financial assets? Are we prepared?

Financial institutions – banks and insurers in particular – would have to absorb this in their balance sheets.

The stress test results published by the EBA this summer showed that the banking sector would be able to cope with a very severe scenario.

We will have the results of the stress test for the insurance sector by the end of the year.

So for these types of institutions, we have – or will soon have – a clear idea of how they might cope.

But for asset management – another key part of the financial system – the picture is less clear.

Market turmoil from the pandemic has once again highlighted how inter-connected the asset management and banking sectors are.

Investment funds don’t absorb losses caused by falling asset prices, they pass them on to their investors.

But open–ended funds have to meet regular redemption requests. If they lack the liquidity to do so, they may be forced into fire sales.

The drop in asset prices could then accelerate, damaging the rest of the financial system and economic confidence.

This was highlighted in 2018 by the ESRB in its recommendation on leverage and liquidity in investment funds.

To make such a scenario less likely, the Commission has just put forward a proposal improving the availability and use of liquidity management tools in our review of the Alternative Investment Fund Managers Directive.

How dangerous an abrupt asset price correction would be for financial stability and the economy as a whole would depend on what feedback loops it might trigger.

From a macro-prudential perspective, it is vital to understand the interactions between institutions and between the different sub-sectors of the financial system.

This requires data on risk exposures and interdependencies.

Our upcoming Supervisory Data Strategy will be an important step towards better data.

With this strategy, our goal will be to make the collection of supervisory data more efficient and less burdensome.

But we also want to enhance the quality of the data, making it more usable for systemic risk detection and systemic stress testing in the future.


Another element of risk for financial stability is the EU’s over-reliance on CCPs outside the European Union.

Central counterparties are an important part of the financial ecosystem. They intermediate a growing share of derivatives trade. They are key infrastructures to manage risk, but could propagate financial instability in the event of stress.

Since Brexit, the EU depends too heavily on third-country CCPs, an issue that has also been analysed in depth by the ESRB.

We need to expand the EU's own clearing capacity to safeguard financial stability in the medium-term.

Next year, the Commission will propose measures to make EU-based CCPs more attractive to market participants.

Our focus will be on building domestic capacity and strengthening the supervisory framework for CCPs, including a stronger role for EU-level supervision.

But to safeguard financial stability in the short-term, we will extend the current equivalence for CCPs. That’s important to avoid a cliff-edge scenario at the end of June next year.

In sum, we cannot know what the future holds and when the next crisis might come.

But the ESRB has a key role to play in ensuring that a future crisis will not originate in or be amplified by the financial system.

[Digital Finance]

Maintaining financial stability over the next 10 years also means staying alert to changes in the financial system, especially around digitalisation.

In the markets today, there is one asset class booming more than any other – crypto.

In November, total market capitalisation of crypto assets reached 3 trillion dollars, more than six times what it was a year ago.

And that does not include the capitalisation of all crypto service providers.

On top of this, crypto-based derivatives are gaining traction.

Up until now, crypto was a step removed from mainstream finance. But this is changing as the appetite for crypto increases.

In the EU, we are committed to supporting innovation while maintaining financial stability and protecting investors from risks.

In September last year, the Commission put forward the ‘Regulation on Markets in Crypto Assets' – or MiCA for short.

The goal of this regulation is to provide legal clarity and certainty for crypto-asset issuers and service providers.

We want to make sure that we have the right rules in place to capture risks to consumers, market integrity, financial stability and monetary sovereignty.

So MiCA is timely, and it’s important.

And I’m glad to see the legislative process on MiCA is moving forward, with the Council recently adopting its general approach. We hope that the European Parliament will make swift progress too.

We need to understand the risks that the fast-growing crypto economy can pose to financial stability, especially as it becomes more intertwined with “traditional” finance.

Analysing the broader financial stability issues related to crypto-asset markets could become an important task for the ESRB.

At the same time, we must be open to exploring the full potential of the technology that underpins crypto assets - distributed ledgers, or DLT for short.

The European Parliament and the Member States reached a political agreement on the DLT pilot regime late last month.

This will put Europe at the forefront of innovation, allowing market participants to safely experiment with DLT to issue, trade and settle securities in a crypto-asset format.

This is a big step forward and a prime example of the EU’s commitment to fostering innovation, while also addressing associated risks.

[Macro-prudential framework review for the banking sector]

The rise of crypto is one of the key developments that our macro-prudential framework will need to deal with over the coming years.

Crypto is part of the wider digitalisation of the financial industry.

Digitalisation is leading to new players entering finance – notably fintechs and big tech companies.

Digitalisation also reinforces the importance of cyber resilience.

And of course, climate change presents a big challenge to all of society and the economy, including the financial system.

These are all issues that we will consider as we start to review the macro-prudential framework for the banking sector.

In our review, we will also need to take into account what we learned during the pandemic, which was the first major test of our macro-prudential framework in a crisis situation.

We need to assess what’s working and where improvements can be made.

That is our goal for the first major review of the macro-prudential framework for the banking sector, which we’re currently working on.

For this review, the Commission is counting on the advice from the ESRB. We look forward to receiving this advice next year to feed into our review.

We need to ensure that our framework is ready for the next crisis. And we need to be ready for a crisis that might look very different from the last two.

By enhancing the prudential framework, we can greatly reduce the risk that the financial sector causes or amplifies economic shocks.

We should aim to turn the financial sector into a source of resilience, as it was in this pandemic.

While the growing interconnectedness of financial systems, across countries and sectors, requires oversight and coordination at the European level, I believe that it is a strength of macro-prudential policy that decisions are made by national authorities, taking into account what’s happening on the ground.

Indeed, one big advantage of macro-prudential policy, like fiscal policy, is that it can be much more targeted than monetary policy.

But this should not lead to undue fragmentation of the internal market.

We need to consider what coordination and guidance at the European level is appropriate for a financial system that is much more integrated thanks to progress on the Banking Union and the Capital Markets Union. This is a delicate balancing act.

To tackle the big challenges to financial stability in the years to come, macro-prudential authorities cannot afford to waste time trying to navigate a labyrinth of macro-prudential provisions.

So we should assess how we can make the macro-prudential framework simpler and more transparent.


So in closing, the second decade of the ESRB looks to be both challenging and exciting.

The ESRB responded very well to the pandemic - now we need to think about the vulnerabilities highlighted by the pandemic.

At the same time, the financial system is changing rapidly. New opportunities are emerging. But so too are new risks.

We need a clear understanding of what is happening in the European financial sector – identifying any and all channels where a shock can turn into a crisis.

Oversight and coordination at the EU level is more important than ever.

So to everyone who contributes and has contributed to the work of the ESRB, I would like to congratulate you on 10 years of hard work.

And I would like to wish you the very best of luck for the 10 years to come.

My team and I are looking forward to working with you as we tackle the challenges ahead.


© European Commission

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