ESRB General Board meeting in Frankfurt

The General Board of the European Systemic Risk Board (ESRB) held its seventh regular meeting today.

The current situation

Since the previous General Board meeting on 21 June 2012, financial market tensions have subsided somewhat, also owing to recent decisions taken by the ECB. However, high uncertainty and associated fragility persist in the EU financial system; markets remain vulnerable to policy and implementation setbacks and to further market fragmentation.

In order to solidify the improvement and further restore confidence, all authorities, at both the national and the European level, must implement agreed measures fully and consistently. This includes measures to ensure sustainable public finances and competitiveness, a resilient financial system, and a sound European institutional framework. First and foremost, it is the responsibility of national governments to consolidate fiscal positions and implement structural reforms credibly and sustainably. The credibility of these policies must not come to be seen as in doubt; complacency is to be avoided. Implementation should be accompanied by clear and consistent communication with financial markets and the general public.

In addition to the full and consistent implementation of policies, from a macro-prudential perspective, the ESRB points to the need to:

• assess forbearance policies and their implications for provisioning. The ESRB supports the EBA’s work to assess the extent of debt forbearance in the banking sector; to promote coordinated reviews of asset quality across the EU; and to pursue harmonisation of definitions of key aggregates, such as non-performing loans, at the EU level, also with the objective of converging towards a shared definition of forbearance and prospectively assessing its extent. The ESRB also encourages the build-up of adequate levels of provisioning. Finally, it supports the ESMA’s activities in promoting the uniform treatment of forbearance-related practices in corporate financial reports.
• move forward with banks’ balance sheet repair. To reduce uncertainty regarding banks’ assets, possible measures, in addition to banks’ own restructuring efforts, could include: improved standardised public information, including enhanced disclosure of loan loss provisioning and availability of collateral; effective supervisory assessments of loan classification, arrears management and provisioning; and, in the case of systemic events, adopting exceptional measures such as involving third parties in asset evaluation and, where necessary and appropriate, setting up asset management companies to deal with poor quality assets.
• consider the implications of the ongoing balance sheet adjustments for a smooth provision of credit to the economy. Central bank actions have provided the opportunity to manage these adjustments over a medium-term horizon. However, private sector adjustment is necessary, together with public policies, to restore investors’ confidence. This would contribute to reducing uncertainty about long-term funding prospects and hence support lending to the real economy.

Looking ahead

The ESRB had an exchange of views on the proposals recently put forward by the European Commission on the banking union. The discussions focused on, in particular, the macro-prudential aspects of the proposal to establish a Single Supervisory Mechanism (SSM) for the euro area. The ESRB is of the opinion that the macro-prudential benefits of the SSM would be optimised if adequate resolution procedures for banks were implemented in parallel, for countries adhering to the banking union. The ESRB will examine further the possible implications of the establishment of the SSM for macro-prudential oversight in the EU and will, where appropriate, liaise with the relevant authorities in the forthcoming legislative process.

Financial market reference rates have recently come under public scrutiny; it is necessary that their governance and the setting mechanisms be reformed. The General Board’s discussions focused, in particular, on how to rebuild confidence in the integrity of such instruments, on whether, in the future, reference benchmarks should better reflect changes in bank funding structures, and on how to ensure a smooth transition should regulatory reforms be initiated. The members of the ESRB, acknowledging the global dimension of the issue, look forward to the work of the relevant international institutions and fora, such as IOSCO and the BIS. In this context, the ESRB will put its views forward to the relevant authorities, also within the scope of the public consultation on the regulation of indices that was launched by the European Commission on 5 September 2012.

ESRB activities

The ESRB has today published the first issue of the ESRB risk dashboard. As set out in the ESRB Regulation, the risk dashboard is a set of quantitative and qualitative indicators aimed at identifying and measuring systemic risk; these indicators, which are updated quarterly, are one of the inputs considered by the General Board in its discussions on risks and vulnerabilities in the EU financial system. For more detailed background information, an overview note and two annexes describing the underlying methodology and each indicator can be downloaded from the ESRB’s website.

In the context of the “act or explain” mechanism set out in the ESRB Regulation, the ESRB is processing the replies received from the addressees of its recommendations on: (i) lending in foreign currencies; (ii) US dollar-denominated funding of credit institutions; and (iii) the macro-prudential mandate of national authorities.

In addition to the current issues above, work is also ongoing on three medium-term projects:

• the treatment of long-term guarantees in insurance. Concerns have been expressed about the possible medium-term implications of the future legal treatment of long-term guarantees in the insurance industry, stemming from certain provisions of the draft Omnibus II Directive. In this context the ESRB is participating in EIOPA’s quantitative assessment.
• vulnerabilities linked to bank funding. In light of the impairment of credit and interbank markets, the ESRB, together with the EBA, is reviewing the issue of asset encumbrance and the relevance of certain innovative funding instruments (e.g. synthetic ETFs and liquidity swaps) so as to identify possible sources of systemic risk and policy actions to mitigate them.
• interconnectedness and contagion. The ESRB is examining, together with the ESMA and the EBA, the way in which risks could propagate in credit default swap markets and in the interbank market. The ESRB is also considering how enhanced monitoring could help to identify and reduce systemic vulnerabilities stemming from securities lending transactions (i.e. reuse of collateral, re-investment risk of cash collateral), as highlighted in its response to the European Commission’s public consultation on the Shadow Banking Sector.

Appointments

The General Board has taken note that André Sapir became Chair of the Advisory Scientific Committee, on 1 September 2012, replacing Martin Hellwig who had chaired the Committee since 1 May 2011. André Sapir (formerly Vice-Chair of the Committee) is taking the Chair for a period of 16 months, until 31 December 2013. The two Vice-Chairs are Martin Hellwig and Marco Pagano.