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05 October 2022

CEPR/Vox: Making the EU macroprudential framework fit for the next decade


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)....

 more at CEPR/Vox

Figure 1 Common Equity Tier 1/risk-weighted assets ratio of banks in the EU
(percentages, interquartile range and median, latest observation Q4 2021)

igure 1 Common Equity Tier 1/risk-weighted assets ratio of banks in the EU

Source: ESRB Risk Dashboard (2022).


Authors

CEPR/Vox



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