ESRB General Board meeting in Frankfurt

Strengthening the EU’s financial system is needed for a sustainable recovery

At its meeting today in Frankfurt, the ESRB General Board concluded that, despite improved financial market conditions, strengthening the EU’s financial system is needed for a sustainable recovery. Further efforts to boost confidence in banks’ balance sheets are central to ensuring the supply of credit to the real economy. The General Board also noted the challenges faced by many insurers in a prolonged low-yield environment. In addition, the Board discussed the ongoing work towards a more comprehensive framework for macro-prudential policy in the EU.

Financial market conditions have generally improved since the General Board’s previous meeting on 20 December 2012. However, fragilities in the EU financial system persist, making it vulnerable to adverse macro-financial dynamics. Lower-than-expected economic activity could impact banks’ profits. Uncertainty about banks’ balance sheets affects their ability to raise capital and market funding, and to provide credit to the real economy. This, in turn, could hamper a sustainable recovery.

The ESRB shares the Eurogroup’s view on the importance of fully guaranteeing deposits below EUR 100.000 across the EU. Increased legal certainty for bank creditors regarding the priority of their claims would reinforce the resilience of the financial system.

Measures to boost confidence in banks’ balance sheets must continue

To enhance market confidence in banks’ resilience, efforts to ensure that banks’ assets are valued correctly should continue. In this context, harmonising definitions like forbearance and non-performing loans is an important step in the right direction.

Insurers face challenges from a prolonged low-yield environment

A low-yield environment over an extended period creates a number of challenges. It exposes the vulnerabilities of the business models of life insurance companies issuing long-term guarantees and may contribute to excessive search for yield. The medium-term solvency and profitability of insurers exposed to these risks call for scrutiny. From a macro-prudential perspective, channels of potential contagion, both to and from life insurers, should be further investigated.

Towards a sound macro-prudential framework across the EU

A sound policy framework is essential for the effective conduct of macro-prudential oversight both at national and EU level. The ESRB has made important progress towards a comprehensive framework linking the preservation of financial stability – the ultimate objective of macro-prudential policy – to a set of intermediate objectives (e.g., mitigating excessive credit flow fluctuations), and an indicative set of macro-prudential instruments to achieve these objectives (e.g., counter-cyclical buffers).

Today, the ESRB General Board published the third issue of the risk dashboard, which is a set of quantitative and qualitative indicators of systemic risk in the EU financial system.