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03 June 2015

VoxEU: Macroprudential supervision in the Eurozone - Beware of excessive expectations

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This column argues that, while based on the right principles, the EU framework grants supervisors a high degree of discretion that entails the risk of limited commitment and excessive fine-tuning.

The financial crisis of 2007-2009 strongly altered the view of regulation and supervision of financial institutions. Microprudential regulation and supervision – directed at the individual institution – had not prevented the crisis, but had contributed to it or at least made it worse (Hellwig 2009). Therefore, there is now a broad consensus that supervision ought to include a macroprudential perspective that focuses on the stability of the entire financial system rather than on individual institutions.

To this end, in the EU, a large number of new institutions and regulatory instruments have been created. This has resulted in a complex web of macroprudential supervisory structures and a large new toolkit, which has raised great expectations regarding the effectiveness of the new approach. This column presents and critically evaluates the newly created macroprudential framework in the Eurozone, with a particular focus on Germany. We make the following major suggestions:

  • In the Eurozone, macroprudential supervision should be integrated (comprising all sectors of the financial system), federally organised and located outside the ECB. Moreover, it should be combined with microprudential supervision.
  • At the national level, the influence of politics should be strictly limited.
  • To avoid delayed responses, commitment should be strengthened by gradually moving towards a more rule-based approach.
  • In view of the macroprudential tools’ uncertain and limited effectiveness, macroprudential supervision should rely on robust tools and avoid excessive fine-tuning.
  • Finally, macroprudential policy should not be overburdened and central banks should stand ready to deal with emerging threats to financial stability, especially when additional risks arise from monetary policy.


Full article on VoxEU


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