Macroprudential Policy Implementation in Europe Session 1: Macroprudential policy – ultimate objective and institutional framework Francesco Mazzaferro and Tuomas Peltonen 17-19 October 2018 Contributions by Jarn Denijs, Frank Dierick and Stéphanie Stolz are gratefully acknowledged
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Macroprudential Policy Implementation in Europe
Session 1: Macroprudentialpolicy – ultimate objective and institutional framework
Francesco Mazzaferro and Tuomas Peltonen
17-19 October 2018Contributions by Jarn Denijs, Frank Dierick and
Stéphanie Stolz are gratefully acknowledged
1. Ultimate objective of macroprudential policy
1. Systemic risk
2. Ultimate objective
2. Institutional framework
1. The European System of Financial Supervision
2. Mandate and powers of the ESRB and the ECB
3. Operationalising the framework
Overview
2
1. Ultimate objective of macroprudential policy
1. Systemic risk
2. Ultimate objective
2. Institutional framework
1. The European System of Financial Supervision
2. Mandate and powers of the ESRB and the ECB
3. Operationalising the framework
Overview
3
Ensure financial stability
Characteristics of a stable financial system (Schinasi, 2004)
o Financial resources are being efficiently and smoothly reallocated from savers
to investors
o Financial risks are being assessed and priced reasonably accurately and they
are being efficiently managed
o Financial shocks can be comfortably absorbed
European Central Bank (Financial Stability Review, preface)
“… a condition in which the financial system – comprising of financial
intermediaries, markets and market infrastructures – is capable of withstanding
shocks and the unravelling of financial imbalances, thereby mitigating the
likelihood of disruptions in the financial intermediation process which are severe
enough to significantly impair the allocation of savings to profitable investment
opportunities.”
Objectives of macroprudential policy
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Prevent and mitigate systemic risk
ESRB (EU Regulation No 1092/2010, Art. 2, 2010)
“Systemic risk means a risk of disruption in the financial system with the potential to
have serious negative consequences for the internal market and the real economy.”
• Time dimensionReflects cumulative (procyclical) risk build-up in financial system with
- excessive risk exposure in boom phase and
- excessive risk aversion in bust phase,
accompanied by high volatility in leverage and maturity mismatch
• Cross-sectional dimensionReflects distribution of risk in financial system at given point in time depending
on
- size and concentration of financial institutions
- interconnectedness of activities (direct and indirect linkages) covering risks of
contagion
Objectives of macroprudential policy
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European Systemic Risk Board (2014)
“The ultimate objective of macroprudential policy is to contribute to the
safeguarding of the stability of the financial system as a whole. This includes
strengthening the resilience of the financial system and decreasing the
build-up of vulnerabilities, thereby ensuring a sustainable contribution of the
financial sector to economic growth.”
Objectives of macroprudential policy
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1. Ultimate objective of macroprudential policy
1. Systemic risk
2. Ultimate objective
2. Institutional framework
1. The European System of Financial Supervision
2. Mandate and powers of the ESRB and the ECB
3. Operationalising the framework
Overview
7
The European System of Financial Supervision
European Systemic Risk Board
(ESRB)
European Banking Authority
(EBA)
European Insurance and Occupational Pensions Authority
• Macroprudential unweighted limit to less stable funding
(e.g. loan-to-deposit or LTD ratio)
• Margins and haircuts requirements
Exposure concentration • Large exposures restrictions
• Clearing requirement for central counterparties (CCPs)
and management of clearing exceptions
Misaligned incentives • Capital surcharge for systemically important institutions
(SIIs)
Resilience of financial
infrastructure
• Margins and haircuts requirements
• Increased disclosure
• Structural systemic risk buffer
Developing the policy framework – intermediate objectives
and instruments
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Source: Macroprudential database ESRB.
Notes: Chart only includes measures which were still active on the 1st of October 2018 and which were considered substantial. An active measure is a measure
which has not been discontinued; updated measures are only counted once. All measures are deemed to be substantial apart from measures of a more procedural
or administrative nature, such as the early introduction of the capital conservation buffer and exempting small and medium-sized investment firms from the capital
conservation buffer. The figure also does not include the CCyB because it is set periodically.
Developing the policy framework – setting of CCyB rates
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• Recommendation on guidance for setting CCyB rates
(ESRB/2014/1):
A. Principles
1. Objective of the buffer
2. Buffer guide
3. Risk of misleading information
4. Release of the buffer
5. Communication
6. Recognition of buffer rates
B. Guidance on credit-to-GDP gap, benchmark buffer rate and buffer
guide
C. Guidance on variables indicating the build-up of system-wide risk
associated with excessive credit growth
D. Guidance on variables indicating that the buffer should be