Hearing on the ESRB before the Committee on Economic and Monetary Affairs of the European Parliament

Introductory Statement by Mervyn King, 1st Vice Chair of the ESRB, Brussels, 02 May 2011

Mrs. Bowles, and members of the Committee, let me thank you for the opportunity to appear before you and to make a brief opening statement.

The recent banking and financial crisis has had a devastating impact on the European economy. Total output is around 5-10% below where it would have been had output followed its pre-crisis trend. And the European banking system is still in need of further repair. Reform of our financial system – both its structure and regulation – is essential if we are to avoid another crisis.

An efficient and competitive financial sector is a crucial ingredient of a successful economy. But one of the main lessons of the crisis is that the balance sheet of the banking system expanded to the point where it became a source of fragility and led to greater volatility of the real economy. So one of the aims of the new European Systemic Risk Board (ESRB) is to look beyond individual institutions to the system as a whole.

The ESRB has taken some significant first steps. As you know, the General Board has already met twice this year and will meet again next month. A Steering Committee, on which I sit, has been established and is guiding the work to be presented to the General Board. To assist with that, the Advisory Technical Committee is up and running and the members of the Advisory Scientific Committee have been appointed.

Going forwards, the ESRB faces three main challenges.

First, to consider and make warnings and recommendations. There are still many risks to the recovery of the European economy. The sovereign debt crisis and the associated imbalances within the European economy, and the unsustainable patterns of demand resulting from very low long-term real interest rates, are among the most important. I am optimistic that the ESRB will not shy away from these problems, and I have been struck by the positive and determined commitment of so many senior policy-makers evident in the meetings to date.

Second, the range of policy instruments of the ESRB needs to be defined. Since the ESRB does not have binding powers, the analysis and arguments that it deploys must be of the highest standard if the principle of ‘comply or explain’ is to be effective. But it is important that the ESRB is not unduly constrained in its recommendations to national authorities. Take one example. Under the current proposed Capital Requirements Regulation maximum harmonisation would not only limit the countercyclical buffers that could be imposed, but would also limit the number of instruments at the ESRB’s disposal. In certain situations such a toolkit could be too weak or too restricted to prevent a build-up of excessive risk and leverage. It would be peculiar if one European body inadvertently prevented another from carrying out its remit.

Third, the ESRB will have to co-operate closely with the three European Supervisory Authorities, and my colleague Andrea Enria will say more on this.

Let me conclude by saying that, in my role as vice Chair of the ESRB, I am fully committed to assess the risks to EU financial stability and, more importantly, to act upon them. And I stand ready today to answer any questions you have about the work of the ESRB.