ESRB General Board meeting in Frankfurt
The General Board of the European Systemic Risk Board held its 13th regular meeting on 20 March
The ESRB General Board discussed the risks and vulnerabilities in the global financial system. The European Union regulations establishing the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) call for Union-wide stress tests to be initiated and coordinated by EBA and EIOPA in cooperation with the ESRB. As part of this cooperation, the ESRB contributes to the design of scenarios of adverse economic and financial market developments to assess the resilience of financial institutions. Upon completion, these adverse scenarios will be transmitted to the EBA and the EIOPA, for publication by end April 2014.
The General Board also discussed possible systemic risks that may emerge from large banking systems, based on a draft report representing the views of the Advisory Scientific Committee (ASC). The ASC pointed out that a large stock of bank credit may also be associated with greater risk-taking by banks and a higher frequency of banking crises. It also found that in the long run financial systems with heavy reliance on bank-based lending may be associated with lower economic growth. In the subsequent discussion, a range of views was expressed. General Board members agreed on the need to favour an appropriate diversification of sources of financial intermediation and underlined the necessity to ensure the resilience of large banks in particular. The ASC report will be made available on the ESRB website in due course.
The ESRB General Board approved a response to a public consultation by the Central Bank of Ireland entitled ‘Loan Origination by Investment Funds’. While still limited at this juncture, loan origination by investment funds could be a valuable source of financial intermediation and thereby contribute to a welcome diversification of funding for the real economy. Nonetheless, if not subject to adequate macro- and micro-prudential regulation, this activity could grow rapidly and introduce new sources of financial stability risk. It was noted that this activity could increase regulatory arbitrage opportunities between the banking and non-banking lending sector. It could also raise the financial system’s vulnerability to runs, contagion, excessive credit growth and pro-cyclicality. Authorities should have adequate tools to monitor and mitigate these risks before providing support to this activity. ESRB members noted also the need to ensure appropriate levels of consumer protection if investment funds that originate loans were to be offered to retail investors. Without prejudice of a further analysis of potential systemic risks arising from loan origination by investments funds, the ESRB response provides a broad outline for developing potential macro-prudential measures to mitigate these risks, beyond those already available in the current EU legislation (Alternative Investment Fund Managers Directive).
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