BIS: Macro-prudential policy – strengthening the foundations, enhancing the toolkit and taking action

05 October 2011

The sources and the propagation of the financial crisis have proven the need for macro-prudential policies to address systemic risk, as well as take account of the interplay between the financial system and the real economy.

Mr Vítor Constâncio, Vice-President of the European Central Bank, gave a keynote address at the first conference of the Macro-prudential Research Network (MaRs), Frankfurt am Main, on 5 October 2011.

1. A snapshot of progress in macro-prudential research

Goal of the Macro-prudential Research Network (MaRs) is to act as a catalyst for more and better-targeted academic research and to fill the identified analytical gaps:

• the development of macro-financial models linking financial instability and the performance of the economy;
• the analysis of the interactions between monetary and macro-prudential policies;
• the assessment of contagion risks.

2. The ECB’s top-down stress-testing framework

MaRs main aim is to be in a position to carry out systemic risk assessments in real time, directly and regularly supporting policy discussions. The top-down stress-testing framework developed by the ECB is one of MaRs major tools. The top-down analysis provided a basis for benchmarking and, where necessary, to challenge the results of the bottom-up exercise. For instance, the top-down stress test uses common methodologies and assumptions across all banks, whereas the bottom-up approach allows for some heterogeneity across banks with respect to certain assumptions and applications, such as the use of banks’ own internal credit risk models. The top-down assessment can therefore be employed to capture outlier results of individual banks in the bottom-up stress test.

The current ECB top-down macro stress testing consists of four broad areas:

• a macro-financial scenario building block;
• a benchmark parameter block;
• the balance sheet part of the framework;
• contagion and feedback effects.

3. The use of macro-prudential policy instruments in the Single Market

As a consequence of the lessons learned from the crisis, the focus of financial regulation has gradually shifted towards a macro-prudential approach:

• establishment of authorities with macro-prudential mandates at both the national and the international level (in the EU context, the ESRB);
• the Basel III regulatory framework – considered the cornerstone of the global regulatory reform for banks;
• other elements (capital and liquidity rules which aim to mitigate risks at the level of individual institutions, but which could, in principle, be recalibrated to address macro-prudential concerns as well).

The maximum harmonisation approach aims to ensure a consistent implementation of prudential measures in the Single Market. It ensures that a level playing field for financial institutions will be established through a single rulebook, thus avoiding regulatory arbitrage and distortions to competition. Furthermore, the harmonised rules also support financial integration and improve transparency. Finally, this approach also reduces regulatory costs as well as banks’ compliance costs.

However, given that regulations are directly applicable and Member States cannot modify them or add provisions unless this is explicitly provided for in the regulation itself, therefore the establishment of a general macro-prudential regime in the Capital Requirement Regulation is warranted. This macro-prudential regime should have three main features:

• adjustments should only be possible in the direction of strengthening the harmonised minima;
• only calibrations should be subject to upward adjustment;
• macro-prudential regime should be subject to strict safeguards, under the ex ante coordination of the ESRB.

Full speech

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