ESRB General Board meeting in Frankfurt

The General Board of the European Systemic Risk Board (ESRB) held its 18th regular meeting on 18 June 2015.

The General Board identified a global repricing of risk premia and a weakening of financial institutions’ balance sheets as the key EU financial stability risks. Despite signs that the economic outlook is improving, the recovery of the EU economy remains uneven and fragile, in part reflecting the ongoing strains in the financial system. Given the current low market pricing of risk, a number of factors – such as surprises in macroeconomic developments, institutional and geopolitical uncertainties, and changes in the monetary policy stances of major central banks – could trigger or intensify repricing spirals, possibly also exacerbated by low market liquidity. Furthermore, the General Board highlighted medium-term risks related to public and private debt sustainability and the concerns that the development of market-based finance in the European Union may be accompanied by growing complexity, opaqueness and interconnectedness in the shadow banking sector. In the light of these risks, the General Board focused on the vulnerabilities in the EU life insurance and asset management industries, related to the low interest rate environment, and potential systemic risks. The ESRB is assessing, from a macro-prudential perspective, potential financial stability effects from the current low interest rate environment and structural changes in the financial sector. A report including potential policy proposals is to be presented to the General Board in mid-2016.

Attention was also given to the impact of the exposures of the financial system to specific sectoral risks. The build-up of vulnerabilities in some sectors of the economy (e.g. real estate and energy) can become a source of systemic risk, especially if bank exposures to these vulnerabilities are large and concentrated. Such developments may call for specific policy responses. To help macroprudential authorities evaluate such vulnerabilities, the ESRB has developed a common methodology and indicators for the assessment of transmission channels and of emerging threats to financial stability arising from sectoral vulnerabilities.

The ESRB is also providing its contribution to the review of the European Markets Infrastructure Regulation (EMIR). The regulation calls for an ESRB opinion on the efficiency of margining requirements to limit pro-cyclicality and on the need to define additional scope for intervention in this area. The General Board expressed the view that there is room for some adjustment and clarification of the current microprudential rules on margining requirements in EMIR. Moreover, it has called for a possible macroprudential use of margins and haircuts, allowing authorities to apply measures on margins and haircuts with macroprudential objectives in the future. This could be further developed in a global context, under the lead of the Financial Stability Board. The ESRB view will be released in summer 2015.

The General Board also discussed indirect channels of financial contagion, in particular how illiquidity spirals and information spillovers can transform relatively small initial shocks into systemic crises. Potential policy options for mitigating indirect channels of financial contagion are related to macroprudential liquidity regulation, restrictions on both margins and haircut requirements across all segments of the financial system, and information disclosure. The ESRB will examine these issues further and a conference on the macroprudential use of margins and haircuts – also open to representatives of academia, the regulatory community and the financial sector – will be held in 2016.

Mr Klaas Knot, President of De Nederlandsche Bank, was elected as a member of the ESRB Steering Committee. He replaces Mr Ewald Nowotny, Governor of the Oesterreichische Nationalbank, whose term of office on the Steering Committee has come to an end.

The ESRB is today releasing a number of reports. They include:

  • A review of macroprudential policy in the EU one year after the new prudential rules for banks came into force. This report describes the discussion at the March meeting of the General Board on the use made by EU Member States of the new set of policy instruments included in the Capital Requirements Regulation and Directive (CRD IV). The ESRB intends to publish this report on an annual basis.
  • A report on the macroprudential aspects of conduct risks. This report has been also sent to the Financial Stability Board, the Basel Committee on Banking Supervision and the Legal Entity Identifier Regulatory Oversight Committee. Misconduct is a serious criminal activity, which damages society and the financial sector and may have an overall systemic impact on the economy.
  • A report on the macroprudential use of the leverage ratio (as a new chapter of the ESRB Handbook on Operationalising Macroprudential Policy in the Banking Sector), as already announced at the March meeting of the General Board.
  • The 12th issue of the risk dashboard. The ESRB 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.

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