ESRB General Board meeting in Frankfurt

The General Board of the European Systemic Risk Board (ESRB) held its 20th regular meeting on 17 December 2015.

The risk of re-pricing in financial markets and a resultant increase in vulnerability of financial institutions’ balance sheets was highlighted by the General Board as the main concern as regards financial stability in the EU. The risk of an abrupt reversal of global risk premia mostly reflects uncertainties regarding recovery in the global economy and vulnerabilities in key emerging market economies. Elevated geopolitical risks, as well as expectations of increasingly divergent global monetary policies, add to the uncertainties. The re-pricing of risk premia could potentially adversely impact EU banks and other financial intermediaries through the materialisation of market and interest rate risks. In that regard the General Board endorsed the work of the Basel Committee on the Fundamental Review of the Trading Book to reform the market risk framework and looks forward to its implementation once completed. Until then, the General Board continues to monitor related risks. The General Board also discussed vulnerabilities related to the EU real estate sector, both in cases where property price levels may be seen as elevated and in cases where real estate-related lending and borrowers’ indebtedness levels need to be monitored. The ESRB continues to monitor medium-term risks related to public and private-sector debt sustainability.

The current low global interest rate environment may have unintended effects on some economic sectors or in some countries that may require the use of targeted macroprudential measures. In light of this, the General Board discussed macroprudential issues and structural change in a low interest rate environment, including the implications and potential vulnerabilities for the EU financial system. In further work the risks related to the identified trends and the areas where macroprudential policies might be needed will be assessed.

The General Board also discussed the possible systemic risks arising from the transition to a low-carbon economy under adverse conditions. A note prepared by the Advisory Scientific Committee concluded that the EU financial sector could be affected via three primary channels: (i) the macroeconomic impact of energy supply or price shocks; (ii) revaluation of carbon-intensive assets (e.g. those related to fossil fuel extraction and energy production); and (iii) an increase in the physical risk associated with climate change, i.e. natural disasters. To quantify the importance of these channels, the disclosure of the carbon-intensity of non-financial firms and of other pieces of information useful for the assessment of climate risks should be enhanced. The General Board endorsed the publication of the Committee’s note in early 2016.

The General Board also considered the adverse scenario which the ESRB is preparing for the 2016 EU-wide European Banking Authority stress test of the banking sector.

Finally, the General Board made four appointments, in line with ESRB Regulation (EU) No 1092/2010, as follows.

• François Villeroy de Galhau, as a member of the Steering Committee, for a term of three years. François Villeroy de Galhau has been Governor of the Banque de France since 1 November 2015.
• Marco Pagano, as Chair of the Advisory Scientific Committee (ASC). Marco Pagano is Professor at the University of Naples Federico II and brings experience as a previous Chair and Vice-Chair of the ASC. He succeeds Philip Lane as ASC Chair.
• Richard Portes, as Vice-Chair of the ASC. Richard Portes has been a member of the ASC since February 2014. He is Professor of Economics at London Business School and is also the founder and President of the Centre for Economic Policy Research (CEPR).
• Prasanna Gai, as a member of the ASC, replacing Philip Lane. Prasanna Gai is Professor of Economics at the University of Auckland, New Zealand. He previously worked for the Bank of Canada and Bank of England, and holds a DPhil in economics from Oxford University.

The Chair and Vice-Chairs of the Advisory Scientific Committee have a voting right on the General Board.

The ESRB is publishing today two reports on residential and commercial real estate and financial stability in the EU.

The ESRB will release the 14th issue of its risk dashboard today. The risk dashboard is a set of quantitative and qualitative indicators of systemic risk in the EU financial system.

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