The General Board of the European Systemic Risk Board held its 32nd regular meeting on 6 December 2018

13 December 2018

At its meeting on 6 December 2018, the General Board of the European Systemic Risk Board (ESRB) noted that risks to the stability of the EU financial system remain elevated amid significant political uncertainties globally and within the EU. Against this background, the General Board exchanged views on the potential vulnerabilities related to cyclical developments. The discussion focused on the profitability of the banking sector, risks in the area of highly-leveraged investment funds and the sufficiency of macroprudential policy measures in view of the different cyclical positions of individual Member States. In addition, the General Board discussed credit and real estate price dynamics across the EU countries, as well as private non-financial sector indebtedness, taking into consideration the macroprudential measures already activated.

The General Board also discussed financial stability risks that could stem from cyber incidents. Cyber risk is unique because of its nature and the speed at which an event can crystallise, the deliberate intent to cause major disruption, the potential scale of the shock (which is not constrained by geographical boundaries) and the high probability that a successful attack will occur (a major cyber incident is a question of when, not if). Last year the General Board established the European Systemic Cyber Group to consider these risks. The group’s work includes surveying national authorities to identify the cyber-related vulnerabilities most common in their individual financial systems. Such vulnerabilities warrant particular focus from regulatory authorities when assessing risks in their jurisdictions. Where relevant, the group drew upon and developed work undertaken in other international fora. It defined “systemic cyber risk” as the risk of disruption to financial services that is (i) caused by an impairment of all or parts of the financial system following a cyber incident and (ii) has the potential to have serious negative consequences for the real economy. The group developed a conceptual framework to help understand when and how a cyber shock could trigger a systemic crisis. Next year, the group will build on this framework, using scenario-based analysis, to inform the General Board of whether a systemic crisis is more likely to occur if particular transmission channels are affected, and/or whether certain cyber incidents are more likely to exhaust the absorptive capacity of the system. By bringing together the analysis of the common individual vulnerabilities with the conceptual framework, the group’s work provides further insight into cyber risks in addition to those supplied by other international initiatives. The ESRB intends to publish its findings by the end of next year with the aim of providing guidance to regulatory authorities on how to mitigate cyber risk and prevent cyber incidents from becoming systemic.

The General Board continued to advance on the monitoring of developments in the EU derivatives markets, which exploits the wealth of information made available to the ESRB under the European Market Infrastructure Regulation (EMIR). EMIR requires transaction-level data on derivative contracts to be reported to trade repositories and grants the ESRB and the European Securities and Markets Authority exclusive access to the full EU-wide dataset.

The General Board also considered the role that macroprudential policy can play in preventing system-wide increases in non-performing loans (NPLs) and/or in increasing banks’ resilience to such an increase, in response to an EU Council request.[1] The General Board concluded that while no fundamental changes to the existing macroprudential toolkit seem to be required, some refinements should be considered. In particular, further work is needed in areas such as the use of sectoral capital buffers and the development of borrower-based measures (for both households and non-financial corporations). Capital-based instruments should also be considered, to address vulnerabilities that might later result in system-wide increases in NPLs, and macroprudential authorities should develop early warning systems to monitor the risks of credit portfolio deterioration from a macroprudential perspective. Finally, some of the triggers of system-wide NPL problems fall outside the scope of macroprudential policy, notably the legal and judicial framework as well as banks’ governance structures. Nevertheless, they determine the circumstances in which any macroprudential policy approach will have to be developed, and, as such, deserve consideration in designing macroprudential approaches to NPLs. The ESRB report discussing these issues will be published in January.

The General Board also held a discussion on the key concepts framing macroprudential stance. A common framework for macroprudential stance would support macroprudential policymakers’ decision-making processes and allowing them to assess the effectiveness of potential policy actions. The existence of a well-established stance concept could also help to mitigate a possible inaction bias on the part of macroprudential authorities and could facilitate communication on policy actions to market participants. The General Board noted that given that experience with and understanding of macroprudential policies are at an early stage, the development of a fully-fledged measure of macroprudential stance will still take time. The work done so far will be translated into a first ESRB report, which will be published in the coming months, providing an initial step towards a common framework for macroprudential stance and outlining one conceptual approach to it. As academic research and understanding of the transmission channels of macroprudential policies grow, the concept of stance will develop further.

The General Board exchanged views on the interoperability arrangements of central counterparties (CCPs). An ESRB report in this regard, which proposes clarification of the treatment of interoperability arrangements in the upcoming CCP recovery and resolution framework and specifying in the EMIR Regulation the conditions under which interoperability arrangements for derivatives could be approved and implemented, will be published in the coming weeks.

The electoral body composed of General Board members who are also members of the General Council of the European Central Bank appointed Ignazio Visco, Governor of the Banca d’Italia, as a member of the Steering Committee. Governor Visco replaces François Villeroy de Galhau, Governor of the Banque de France, whose term of office in the Steering Committee has come to an end.

Lastly, the ESRB is releasing the 26th 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.

For media queries, please contact William Lelieveldt, tel.: +49 69 1344 7316.

[1]The EU Council conclusions on an "Action plan to tackle non-performing loans in Europe", adopted by the ECOFIN Council on 11 July 2017, invited the ESRB to develop, by the end of 2018, “macro-prudential approaches to prevent the emergence of system-wide NPL problems, while taking due consideration of procyclical effects of measures addressing NPLs’ stocks and potential effects on financial stability”.