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

Introductory Statement by Andrea Enria, 2nd Vice Chair of the ESRB, Brussels, 02 May 2011

Dear Madame Chair, dear Honourable Members,

I am very grateful for this opportunity to appear before this Committee today in my capacity as second Vice Chair of the European Systemic Risk Board (ESRB). As my role in the ESRB derives from my position as Chair of the Joint Committee of the European Supervisory Authorities (ESAs), I will focus my remarks on the need to ensure a smooth interplay between micro-prudential and macro-prudential supervision.

A major lesson from the crisis is that macro-prudential oversight has not been effective enough in identifying new sources of systemic risk and driving timely policy responses. I will briefly review the three main issues that need to be tackled, which call for close cooperation between the ESRB and the three ESAs.

First, so far macro-prudential oversight has not sufficiently benefited from supervisory input.

In the EU, regular and ad hoc data collections have been conducted in the past, with the support of banking supervisors. More can be done on data collections but simply passing on data is not sufficient. Macro-prudential analysis should also rely on bottom-up supervisory input gathered through the ordinary risk assessment of financial institutions and the aggregation of soft information and supervisory assessments resulting from on-site examination and other forms of prudential reviews of financial institutions. Recently, the colleges of supervisors have been involved in reviews of risks compiling information collected in the Supervisory Review and Evaluation Process (SREP) of cross-border groups. But progress is still under way to make this input amenable for macro-prudential analysis, so as to ensure a truly integrated analysis of vulnerabilities and potential risks to financial stability.

The new European System of Financial Supervision (ESFS) addresses this issue: the ESAs contribute substantially to the identification and analysis of risks and vulnerabilities through regular sectoral and cross-sectoral risk assessments, the development of key risk indicators and a risk dashboard, and the conduct of EU-wide stress tests. Clear provisions are in place to ensure a smooth exchange of confidential information. In presence of a reasoned request, also data from individual institutions should be shared with the ESRB.

There are challenges, though. On the one hand, the supervisors having the direct contacts with the financial institutions may lack the macro-prudential perspective that would ensure that appropriate input is provided. On the other hand, requests for supervisory information might overwhelm the supervisory process, generating the impression that macro-prudential analysis crowds out and conflicts with the ordinary supervisory activities instead of supporting them.

The second shortcoming of macro-prudential analysis in the run up to the crisis was the lack of enforcement mechanisms. Even when the risks to financial stability were correctly pinpointed, there were no means to make sure that timely policy action was taken to ensure that the activities giving rise to concerns were effectively scaled down.

Also in this case the new institutional setting provides the correct response: the regulations establishing the ESAs and the ESRB envisage a follow-up mechanism to the warnings and recommendations issued by the ESRB. When action is requested from supervisory authorities, the ESAs play a major role in formulating supervisory responses and monitoring progress.

Ensuring a smooth interaction between the macro-prudential and the micro-prudential dimension will be challenging. The involvement of supervisors in policy decisions and their support for risk warnings and recommendations issued by the ESRB will be essential to make sure that follow-up action is given appropriate priority and leads to effective enforcement in day-to-day supervisory actions. But there might well be cases in which the addressee(s) of the recommendations are reluctant to act. The challenge here will be to ensure that the “act or explain” mechanisms work effectively and that pressure is generated by peers and, when needed, through public pronouncements.

The third shortcoming the new institutional framework will have to address is the build up of systemic risk outside the regulated sector. This is a shared objective for micro-prudential and macro-prudential supervision, and its achievement requires concerted action. Also in this case, the ESRB and the ESAs will face significant challenges. Data availability is the first one, as in this case supervisors can be of limited, if any, help. But even when data are available, it might be difficult to build a convincing case for extending the scope of regulation to capture new sets of institutions. More importantly, financial innovation could be so fast that the extension of the regulatory coverage could be realised when risks have already moved to another unregulated area.

An effective functioning of macro-prudential oversight is a major endeavour and the smooth interaction with supervisory functions is a key ingredient for success. I see my duties as second Vice-Chair of the ESRB mostly related to ensuring that such smooth interplay takes place and that the challenges I briefly recalled are appropriately addressed.

Thank you for your attention.