04 July 2019

ECB's De Guindos: Macroprudential policy ten years after the crisis

Luis de Guindos, Vice-President of the ECB, discusses the financial stability challenges facing the euro area and focuses on the relevance of countercyclical macroprudential policy to safeguarding financial stability and supporting prudent lending, by banks and non-banks, throughout the cycle.

Institutional set-up of macroprudential policy within European banking supervision

This more targeted application of macroprudential policy to individual countries is also reflected in its institutional set-up. National authorities are first in line to counter emerging systemic risk in a timely manner by deploying the available instruments. They have detailed knowledge of their domestic banking systems and financial structures. The ECB, in turn, complements the national authorities with its cross-country perspective. It can identify regulatory differences and counter potential inaction bias by the national authorities. To operate this two-tier set-up effectively, the SSM Regulation provides that national authorities must notify the ECB of macroprudential measures they intend to implement. The ECB’s Governing Council may object to these measures and, if deemed necessary, set higher macroprudential requirements than those set by national authorities, commonly known as “top-up”.

The “top-up” option is considered a last resort. There are two main reasons for this. First, national authorities being responsible for addressing financial imbalances creates a clear expectation that they do so in a timely manner. If national macroprudential authorities can act with a complete macroprudential toolkit to fulfil their mandates, the scope for the ECB to set higher requirements is more focussed to address risks from cross-country spillovers to secure a consistent application across countries. Second, macroprudential policy authorities, represented by national central banks and supervisors, come together at the ECB’s Financial Stability Committee (FSC). The FSC serves as the central platform of exchange at the technical level for authorities to share their experience in financial stability and macroprudential policy. The Committee has achieved important milestones in increasing data coverage and quality, assessing systemic risk and developing calibration strategies for macroprudential instruments.

This holds also true for those instruments that are not fully harmonised at EU level. For example, borrower-based measures such as loan-to-value, loan-to-income or debt service-to-income can limit the leverage of households and non-financial corporations. These instruments are thought to be the most effective macroprudential instruments for curtailing excessively risky credit origination. Indeed, because of their effectiveness, 13 countries have already implemented measures targeting the specificities of their real estate markets.

Nevertheless, some euro area countries do not have the full legislation in place to deploy all borrower-based measures.[6] And even if they do, the institution that decides on borrower-based instruments is not always the central bank or the supervisory authority. This creates an additional hurdle to deploying the best macroprudential policy responses. As a result, some macroprudential authorities use recommendations to the financial institutions as a second-best option. [...]

The ECB’s view is that banks’ overall capital levels are currently appropriate. Nevertheless, the current buffer calibrations prevent them from being used countercyclically throughout the cycle. The limited size of the CCyB calibrations restricts the possibility for releasing it to support lending to the real economy if the cycle turns. As macroprudential authorities, we are therefore continuing to review the implementation and scope of the available instruments. In this respect, we very much welcome last month’s publication of the new Capital Requirements Directive (CRD V) and Capital Requirements Regulation (CRR II) to strengthen the macroprudential toolkit.

Role of the non-bank financial sector and macroprudential policy

 

Despite the many achievements in the regulatory reform process since the crisis, there are areas where more work needs to be done. In my view, the regulatory framework for the non-bank financial sector is one of these areas. First of all, the sector has grown significantly in size and importance. Second, it is accumulating ever more risks on its balance sheet. And third, work on the macroprudential framework for this sector is still in its infancy. [...]

I have argued in the past that, from a regulatory perspective, we need to establish at least two lines of defence for evolving risks. First and foremost, the non-bank financial sector needs to have solid prudential standards. But this will not be sufficient if risks evolve more broadly and across institutions. We will also need an extension of the macroprudential toolkit to the non-bank financial sector, in order to provide the authorities with the means to address risks at system level. While the macroprudential framework for banks is relatively well developed and provides authorities with tools to address cyclical and structural systemic risks, the framework for non-banks is still in its infancy and needs to be further developed.

There are substantial differences between banks and non-banks. When we look at financial stability concerns in non-banks, we are looking less at the risk-bearing capacity of the individual institution’s balance sheet and more at the potential for contagion and shock amplification through the system and amplification of the broader financial cycle. So the key risks that we look at relate to liquidity, leverage, procyclicality and interconnectedness. A macroprudential framework for non-banks would need to identify and address the key fragilities and externalities stemming from the non-bank sector, and provide the appropriate tools for authorities to achieve this in an efficient and effective manner.

Such a framework should support the beneficial role that non-banks play in financial intermediation and ensure the sustainable development of non-bank financing. On a note of particular relevance in a monetary union, it would thereby help reap the full benefits of a deep and integrated European capital market. In this respect, the ECB continues to support the further development and deepening of EU capital markets through the capital markets union (CMU), not least in the light of the approaching exit of the United Kingdom.

The United Kingdom’s departure from the EU’s Single Market will, by its very nature, affect the shape of Europe’s future financial market architecture. Non-bank financing of the euro area economy is no exception to this, particularly given the substantial role played by London as a financial hub for European capital markets. Planning by the financial industry suggests that Brexit may result in a substantial relocation of activity to a number of different euro area countries, which may lead to a multi-centric European financial system. In a financial system with a number of increasingly important hubs rather than one dominant centre in London, it will be more important than ever that these hubs can interact with one another efficiently. This will require policies that foster the integration of EU capital markets by addressing barriers to integration and encouraging supervisory convergence. So Brexit is both a challenge and an impetus to our pursuit of the ambitious plans laid out under the CMU. [...]

Full speech

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