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11 December 2009

Trichet: proposed establishment of European Systemic Risk Board is a very important initiative for containing systemic risks

At a Cambridge University conference he set out the new challenges for macro-economic supervision, including controlling the very fast growth of innovative financial instruments and new intermediaries, in particular, off-balance sheet vehicles.

Trichet started by saying that restoring financial stability and containing systemic risk in the future are at the heart of the supervisory and regulatory reforms currently being discussed in Europe and elsewhere.

He then explained the following issues that have been learned from the crisis to control systemic risk:
·         There is a need for much more analysis of the implications of the business models of major intermediaries for the system as a whole. Some of the crucial factors, whose relative importance has shifted over time, include originate-to-distribute models, rising maturity mismatches and the combination of proprietary trading and investment advice.
·         The very fast growth of innovative financial instruments and new financial intermediaries, in particular, off-balance sheet vehicles, can imply significant risks.
·         Financial integration needs to be accompanied by reform of supervisory and regulatory approaches and institutions. Major reforms in this area are currently being discussed in the European Council and European Parliament, including the establishment of a European Systemic Risk Board.
·         Advancing financial consolidation raises the question of how to regulate and, in the event, wind down large and complex financial intermediaries whose disorderly failure could pose systemic risks.
·         As financial sectors develop, households may take greater risks, for example, in mortgage markets and, more broadly, in their pension investments. While this also raises issues of consumer protection, from a systemic perspective, it becomes increasingly important to know how resilient the household sector and its consumption can be in such a situation.
Mr Trichet focused on macro-prudential supervision as a policy response to systemic risk. Detecting systemic risks early is the task of macro-prudential supervision. One challenge is to be able to collect all the information that is necessary to identify systemic risks early. It requires combining some micro-level data with and aggregate data from components of the financial system.
He concluded by saying that ‘macro-prudential supervision is an important tool to contain systemic risks and thereby contribute to sustainable growth and prosperity. The proposed establishment of a European Systemic Risk Board next year is a very important initiative in this regard. Ensuring systemic stability will also alleviate undue pressures on monetary and fiscal policies to extend financial safety nets. The standard macroeconomic stabilisation policies can then focus more clearly on their primary objectives and thereby make their own best contribution to growth and well-being’.

© ECB - European Central Bank

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