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It is my impression that banks and market participants have, to date, paid too little attention to the ways in which "macro-prudential oversight" could affect them. However, the potential impact of the instruments available for this task should not be underestimated; on the whole, they are directed at banks, they may affect a category of banks or a national banking industry, and may impact all of the business or just individual business areas. This raises elementary questions such as that of a level playing field.
What is macro-prudential oversight? Before the financial crisis, financial supervision dealt mainly with individual market players or individual institutions. The motto was: if all is well at the individual institutions, all will be well with the system. Attention centred on the micro level; the macro level was not monitored and evaluated systematically, at least not at the national level. Macro-prudential oversight is intended to do just that: its aim is to identify and assess, in a timely manner, developments that could jeopardise the financial system. A key lesson from the crisis is: a macro-prudential perspective must be added to micro-prudential oversight.
As I see it, macro-prudential oversight can take two directions: macro-prudential activities may focus on increasing the resilience of individual systemically important market players. Alternatively, the goal may be to reduce procyclicality. The aim of raising market players' resilience is virtually self-explanatory. In the event of a crisis, players have more room for manoeuvre if they are more stable. Procyclicality in the financial system is the result of self-reinforcing feedback effects between the financial system and the real economy - so the objective may be to prevent a bubble emerging or to prepare market players for the bubble bursting.
The appropriate use of macro-prudential measures is anything but easy, however. The measure must not only be suitable, it must also be the mildest possible. The choice of instrument must be suitable and the timing must be right – the measure must not be deployed too soon. The dosage must also be correct; and there must be transparent triggers, for both when to deploy them and when to phase them out. Some thought must therefore also be given to how long they should be in place. And also vital to macro policy: the macro-prudential toolkit still needs some work – at both the national and the international level, as the only measures currently available are those laid down in the CRR and the CRD IV; and those deal exclusively with credit institutions. We lack instruments at the European level that target the behaviour of insurers or other market players.
As critical developments on financial markets know no national borders, macro-prudential oversight and, in particular, any measures resolved, have to be harmonised internationally. Comprehensive and close cooperation between various national and international forums is necessary for measures to have any kind of effect and for the playing field to be as level as possible. European and global forums are required.
The FSB is one forum active in international macro-prudential oversight. It deals with endogenous risks in the financial sector, i.e. vulnerabilities that either originate in the financial system itself or are amplified there. The European Systemic Risk Board (ESRB) began its macro-prudential oversight duties in 2011. Its membership includes the European Central Bank together with the national central banks, the European Commission, representatives of ESRB committees as well as the three European financial supervisory authorities, namely the EBA, ESMA and EIOPA. The ESRB was primarily conceived as an advisory body. It can issue warnings and recommendations. The "comply or explain principle" applies to ESRB recommendations. If institutions do not follow recommendations issued, they have to state their reasons why.
The European Central Bank (ECB) is also to be involved in macro-prudential oversight. The Single Supervisory Mechanism (SSM) is currently being set up. The ECB will be given both micro-prudential and macro-prudential powers which it can exercise over institutions in the SSM member countries.