ESRB General Board meeting in Frankfurt
The General Board of the European Systemic Risk Board (ESRB) held its 16th regular meeting on 18 December 2014
The General Board discussed risks and vulnerabilities in the financial system. Macroeconomic activity remains subdued across the European Union. The environment of low nominal growth makes cross-sectoral attempts to delever more difficult and represents a key challenge to financial stability. This challenge exists against a backdrop of weak bank profitability, tendencies to increased leverage in the non-bank sector, and re-emerging sovereign debt sustainability concerns.
Market expectations for future long-term interest rates have shifted downwards over 2014. An extended period of low interest rates could have side effects for financial stability risks, as asset valuations are more likely to become stretched and subject to sudden spikes in volatility in the context of a global search for yield. These vulnerabilities underscore the importance of further enhancing the framework for macro-prudential analysis of the non-bank sector, and developing macro-prudential tools in this area.
The General Board took note of the results of the EBA 2014 EU-wide stress test, which confirm the overall resilience of EU banks. The ESRB welcomes the detailed disclosure of bank-by-bank outcomes, which provides unparalleled transparency into EU banks' balance sheets. Looking forward, the ESRB intends to improve understanding of possible macro-financial feedback loops owing to banks’ dynamic responses (second round effects) to the adverse macro-economic scenario.
The EIOPA 2014 EU-wide stress test has also identified the challenge faced by the EU insurance sector in two different macroeconomic scenarios of high asset price volatility (core module) and of prolonged low interest rates (low yield module). It shows that a significant part of the EU insurance sector is vulnerable to these scenarios and that the sector needs to press on with its preparations for Solvency II. Looking forward, the ESRB is considering the systemic facets of the insurance industry.
The General Board considered progress made in the implementation of EMIR requirements regarding, among other things, central counterparties (CCPs). EMIR has improved the regulation and supervision of European financial market infrastructures and introduced mandatory clearing for OTC derivatives, which the ESRB supports. The General Board also discussed the outlook and potential risks induced by the increasingly competitive environment in which CCPs operate in the EU and globally. Future stress tests, along with the necessary establishment of recovery and resolution frameworks, will play a crucial role in addressing macro-prudential concerns regarding the systemic importance of CCPs.
The General Board approved the report on the regulatory treatment of sovereign exposures. The report provides an overview of the current regulatory framework for sovereign and government-related exposures, the specific risks, and the scale of banks’ and insurers’ exposures to sovereigns. It explores a wide range of policy options to address these risks, and therefore represents – also in the context of international regulatory reform – an input for further policy discussion. The report will be published towards the end of January 2015.
The General Board discussed the macro-prudential implications of the number and scale of misconduct cases at EU banks. Misconduct imposes costs on society and should be prevented. Systemic risks may arise owing to a negative impact on confidence in the financial sector and a withdrawal from markets by banks, compounded by high and uncertain costs related to misconduct. The General Board has agreed to take additional steps to address these potential systemic effects by proposing the inclusion of the misconduct risks in future bank stress tests and an improvement of cooperation in international fora such as the FSB and the Basel Committee on Banking Supervision.
The General Board also decided to publish a call for expressions of interest for 12 external experts to be appointed as members of the Advisory Scientific Committee of the ESRB. The call will be published in early January in the Official Journal of the European Union and on the ESRB’s website. In addition, the ESRB has established an annual prize for research on systemic risk in memory of Ieke van den Burg. Details of the prize are available on the ESRB’s website.
The ESRB will publish the tenth issue of the risk dashboard on 5 January 2015. The risk dashboard is a set of quantitative and qualitative indicators of systemic risk in the EU financial system. The new dashboard will be available on the ESRB’s website and in the ECB’s Statistical Data Warehouse.
Lastly, the General Board elected Governor Luis Linde as new member of the ESRB Steering Committee. He replaces Ignazio Visco, Governor of Banca d’Italia, whose term of office on the Steering Committee has come to an end.
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