Introductory statement to the press conference
Jean-Claude Trichet, Chair of the ESRB,
Mervyn King, Vice Chair of the ESRB, Andrea Enria, Vice Chair of the ESRB
Frankfurt am Main, 22 June 2011
The ESRB General Board met today for its second ordinary meeting. It had a thorough review of the systemic risks to which the financial system of the European Union is exposed. It concurred that the most serious threat to financial stability in the EU stems from the interplay between the vulnerabilities of public finances in certain EU Member States and the banking system, with potential contagion effects across the Union and beyond.
The current situation
In line with its mandate, the ESRB has discussed the macro-prudential aspects of the current situation in the EU. It notes the progress made in establishing a recovery in the EU real economy and the efforts by EU Member States to put public finances on a sustainable footing. These are important elements in ensuring a stable financial system going forward.
Set against these factors, the difficulties in programme implementation in some countries pose a significant challenge for the financial system especially in view of the extent of its integration in recent times. This integration has produced a financial system that is highly interconnected, both inside and outside the EU, and in which a shock in one part of the world can be quickly transmitted to others.
The General Board highlights a number of key channels that can facilitate and amplify this transmission. These include:
- extensive links within the banking sector given, for example, inter-bank, bond and CDS exposures;
- links between the banking sector and other sectors and markets, given the propensity for fire sales of financial assets arising out of factors such as credit ratings downgrades, collateral margining and certain risk management practices;
- the potential for significant destabilising feedback loops to take hold within the system and between it and the real economy. These can be driven by close links between the assessments of credit worthiness of sovereign and financial debtors and the possibility for contagion both among sovereigns as well as between financial institutions.
A key objective for macro-prudential policy at this juncture is to contribute to ensuring that the EU financial system – in all its components including banks, insurance companies, occupational pensions, securities markets and infrastructure – can continue to recover towards a self-sustaining position. To support this objective, in the near-term, and limit the potential for potential adverse spillovers within the European Union, the ESRB calls upon the competent authorities in the EU and its Member States to deliver on the commitments they have already taken, namely:
- The EU-wide stress test in the banking sector must act as an important tool to enhance transparency in the EU banking system and to provide a clear and rigorous assessment of the resilience of institutions within this sector in the current environment. In particular, the ESRB supports the efforts of the European Banking Authority in these respects and calls upon all competent authorities to cooperate with these efforts, in line with the principles underlined in the supporting EU legislation.
- Simultaneously, at national level backstop plans should exist, either from private markets or, if necessary, public funds to ensure that appropriate plans are in place to deal with the consequences of this assessment. In this regard, the ESRB considers of the utmost importance that remedial measures be applied not only to the financial institutions which will formally fail the stress test, but are also available to those institutions which pass the test, but are identified by markets to be vulnerable.
Beyond the very near term, the ESRB is monitoring a number of other issues which, individually or collectively, could affect the stability of the EU financial system. The ESRB General Board will follow-up on these issues at its coming meetings. Among these, it highlights the following:
- The ability of banks to reduce maturity, and where relevant currency, mis-matches in their funding structures and to absorb losses arising out of the ongoing credit cycle.
- The risk of potential asset price imbalances (in particular in property markets but also in financial and commodities markets).
- And the external risks posed to the system from current international capital flows, asset growth in emerging countries and a re-emergence of economic imbalances at a global level.
The ESRB is also considering a number of other ways to reinforce the resilience of the EU financial system going forward, in the light of various specific challenges it has identified:
- The incentives for the risk-taking behaviour of financial system participants, and the implications for some components of the system such as insurance companies, in an environment of prolonged low interest rates.
- The increasing distribution of complex and opaque investment products to retail investors. For example, exchange-traded funds have expanded rapidly in recent years. Estimates suggest that the value of the European ETF market now exceeds US$300 billion. ‘Synthetic’ ETFs account for almost half of this total.
- The implications arising out of foreign currency borrowing by households and small and medium-sized enterprises in the EU. For example, the Advisory Technical Committee has found that in seven EU countries, over 20% of outstanding lending to households is in a foreign currency - and for four countries, foreign currencies account for over half of all lending to households. For five countries, foreign currency lending also accounts for over half of lending to non-financial corporations.
In addition the ESRB is working to enhance its understanding of various structural features of the financial system, including:
- The identification of key linkages in the EU financial system and how they affect the ability of the system to withstand future adverse events.
- The evolution of existing, and the emergence of new, systemic components within the financial system.
Where relevant this work will draw on and take forward, from an EU perspective, the outcomes of discussions currently underway at the Financial Stability Board.
The ESRB has now finalised its own institutional structures and has started to establish its macro-prudential policy framework.
Yesterday the Advisory Scientific Committee (ASC) met for the first time, under the chairmanship of Prof. Martin Hellwig. The ASC discussed its own work programme for 2011 and also identified priorities. It will work on a wide set of issues, ranging from research topics on systemic risks to more policy-oriented questions, in support of the ESRB activities.
The General Board also elected Mr Jens Weidmann, President of the Deutsche Bundesbank, as member of the Steering Committee, to replace Mr. Axel Weber.
Concerning the establishment of its policy framework, today the General Board of the ESRB has worked on:
- A Decision for the collection of information for the macro-prudential oversight of the financial system within the European Union.;
- An agreement with the three European Supervisory Authorities regarding the confidentiality procedures for the exchange of information, as required by the ESRB Regulation. These arrangements have already been, or are being considered for, approval by the respective authorities. Decision and agreement will be published contemporaneously, once approval procedures will have been finalised;
- The development of the ESRB’s risk dashboard and colour code, in cooperation with the ESAs.
- The range of macro-prudential tools which both competent authorities in EU Member States as well as the ESRB will need to have at their disposal, also taking into account new or planned regulatory measures.
Today, the General Board also supported the nomination of Mr. Francesco Mazzaferro, who is currently performing this function on an acting basis, as Head of the ESRB Secretariat. The General Board was informed by the ECB that a position for Deputy Head of Secretariat would be opened for public applications shortly.