Hearing on the ESRB before the Committee on Economic and Monetary Affairs of the European Parliament

Introductory statement by Jean-Claude Trichet, Chair of the ESRB, Brussels, 07 February 2011

Dear Madam Chair,

Dear Honourable Members,

I am delighted to appear before this Committee today in my capacity as Chair of the European Systemic Risk Board (ESRB) to explain to the European Parliament, as foreseen in Article 5.4 of the ESRB Regulation, how I intend to discharge my duties.

Parlamentowi Europejskiemu należą się gratulacje za nową architekturę nadzoru i szybki proces legislacyjny. Reforma pokazuje, że Europa potrafi skutecznie działać.^[1]

In meinen heutigen Ausführungen möchte ich Ihnen zunächst erläutern, wie wir dabei sind, die Grundlagen für die laufende Arbeit des Risikoausschusses zu legen. Unser Ziel ist, eine effiziente und wirkungsvolle Arbeit des Ausschusses zu sichern, der sich bereits bei der ersten regulären Sitzung im März inhaltlichen Fragen widmen kann.^[2]

Il s’agit de tout le travail déjà accompli et des décisions que nous venons de prendre pour assurer la mise en place dans les délais requis et le bon fonctionnement de la nouvelle instance qu’est le Comité européen du risque systémique (CERS). J'évoquerai, dans un deuxième temps, la politique de surveillance macroprudentielle du CERS, dès lors que les alertes et recommandations s’inscriront dans un cadre cohérent de politiques traitant les risques systémiques.^[3]

Let me stress that the ESRB is just now beginning its activities after its establishment 7 weeks ago and its inaugural meeting 2 weeks ago. Moreover, macroprudential oversight is a new policy area. Indeed, we have a great deal of work ahead of us.

1. Laying the foundations: setting up the ESRB

On 16 December 2010, the legislation establishing the European Systemic Risk Board (ESRB) came into force and I started my period of office as Chair of the ESRB. On the same day, Mr Mervyn King, Governor of the Bank of England, was elected first Vice-Chair of the ESRB by the members of the General Council of the European Central Bank (ECB).

On 20 January 2011, the General Board of the ESRB held its inaugural meeting. This meeting was mainly devoted to laying the foundations for this new EU body.

Let me elaborate on the decisions taken on that day. The Steering Committee consists of 14 members, including four members of the General Board who are also members of the General Council of the ECB. On 20 January 2011, Mr Marek Belka, Governor of the Narodowy Bank Polski, Mr Mario Draghi, Governor of the Banca d’Italia, Mr Athanasios Orphanides, Governor of the Central Bank of Cyprus, and Mr Axel Weber, President of the Deutsche Bundesbank, were elected members of the Steering Committee for three years.

On the same day, Mr Stefan Ingves, Governor of the Sveriges Riksbank, was elected Chair of the Advisory Technical Committee (ATC) for three years. The General Board decided on the ATC mandate. The ATC will provide advice and assistance to the ESRB and will regularly review financial stability conditions in the EU, including the detection of systemic risks. I believe that the ATC could also play an important role in the review and development of macro-prudential policy instruments. Countercyclical capital buffers for banks represent one such instrument; they were the subject of a recently completed public consultation by the European Commission.

Turning to the Advisory Scientific Committee (ASC), the General Board decided to publish a call for expressions of interest for external experts to be appointed as members of the ASC. Let me say a few words on this advisory body, in which this Parliament has expressed a keen interest. The call for expressions of interest is currently available on the ESRB website and will be published tomorrow in all the official EU languages in the Official Journal. Its publication will mark the start of the selection phase. Thereafter, candidates will have three weeks to apply. The aim is to attract leading experts. The mandate of the ASC includes contributions on the definition of methodologies to detect risks and assess the potential impact of their materialisation, on the design and calibration of effective macroprudential policy tools, including improving existing tools or models, as well as an open, independent and analytical review of macroprudential strategies and operational frameworks.

At the meeting, the General Board also established the Rules of Procedure of the ESRB and agreed on its meeting schedule in 2011. This schedule foresees four further meetings of the General Board this year: in March, June, September and December.

Finally, the Secretariat of the ESRB has been established, at the ECB. It includes more than 20 staff members from several EU Member States and with different professional backgrounds. The diversity of staff contributes to a creative synthesis of ideas and the effective functioning of the Secretariat so as to help the ESRB perform its tasks and reach its objectives. Besides, additional staff has been recruited by the ECB to strengthen the ECB’s support for the ESRB.

This is the short overview of the work carried out so far to ensure the timely setting-up of the ESRB. Let me now turn to the future, i.e. macro-prudential oversight by the ESRB.

2. Looking ahead: the ESRB in action

The legislation established the ESRB as an independent EU body “responsible for the macro-prudential oversight of the financial system within the Union”. I would like to stress three important aspects here.

First, the ESRB will focus on preventing and mitigating systemic risks that threaten the stability of the financial system at the level of the European Union. In doing this, the ESRB will pay special attention to horizontal risks across Member States, with potential adverse impacts on the real economy. The ESRB may also address issues in a specific country if they pose a systemic threat to the EU’s financial system (for instance, through spillovers to other countries). And the ESRB will take into account global developments with possible negative externalities for the EU.

Second, the ESRB’s mission – as the Parliament has framed it – is wide-ranging: macro-prudential oversight by the ESRB covers not only banks, but all financial intermediaries, markets, products and infrastructures that may give rise to concerns about financial stability at the EU level.

Third, the ESRB activity will be based on strong cooperation between its members. A key part of the ESRB’s work is to combine the analyses produced by the micro-supervisors and central banks. Let me just say that our inaugural meeting was promising in this respect.

The macro-prudential activities of the ESRB are now starting at the operational level.

The General Board of the ESRB has agreed to have a look at systemic risks in the EU’s financial system each quarter. It may however also study long-term structural issues relevant for financial stability, inasmuch as they may create future risks. The deliberations of the General Board are prepared by the Steering Committee of the ESRB, on the basis of contributions from all member institutions. In particular, for each meeting of the General Board, the ECB will produce an outlook on key systemic risks in the EU, based on its broad financial stability analysis.

The ESRB will make use of a wide set of quantitative and qualitative indicators as well as analytical tools. They will include in particular financial stability indicators, early-warning signal indicators and models, contagion and spillover models as well as stress tests. The Advisory Scientific Committee of the ESRB has a mandate to contribute to analytical methodologies to detect and assess systemic risks. To further develop analytical instruments for macro-prudential oversight, the ECB and the EU national central banks have established a network of researchers called “Mars” (Macro-prudential Regulation and Supervision), dedicated to macro-prudential research.

To ensure a rigorous analysis of systemic risks, the ESRB is planning a data collection process for macro-prudential oversight, relying on its member institutions. In particular, the ECB provides the ESRB with data on macroeconomic developments and other available data on financial system for macro-prudential purposes. The European Supervisory Authorities play a crucial role in collecting supervisory data on financial institutions for the ESRB, which as a rule will be examined in aggregate form. All this information is complemented by market data from commercial data providers and other data sets as well as market intelligence gathered through contacts with private stakeholders.

The ESRB is also planning how to issue warnings and recommendations for remedial policy action. Our Advisory Technical Committee (ATC) will start to investigate possible policy instruments on which the ESRB could make recommendations. With regard to preparations for warnings and recommendations, the ESRB aims at integrating all the necessary expertise in the most efficient way. To this end, the ATC will be involved at an early stage in the preparations. In addition, groups of relevant experts from ESRB member institutions could play an important role.

On this point, as has been decided by the Parliament and the Council, the ESRB does not have binding powers. It must speak convincingly and build up credibility over time. For ESRB recommendations a specific follow-up mechanism – based on the principle of ‘comply or explain’ – is foreseen. And the European Parliament has a specific role to play in this respect. In particular, if ESRB recommendations are made public, the Parliament may invite the Chair of the ESRB to present them and the addressees may also ask to participate in the exchange of views. If, however, ESRB recommendations are kept confidential, they may be addressed in confidential oral discussions that the Chair of the ESRB will hold at least twice a year, behind closed doors, with the Chair and Vice-Chairs of this Committee.

More generally, I am sure that the Parliament will follow very closely the work of the ESRB. The Chair of the ESRB will be invited annually to present the ESRB Annual Report to the European Parliament, and may be requested to attend hearings before the competent Committees. The Parliament may also invite the ESRB to examine special issues. I expect a dense and beneficial interaction as from the coming months.

Let me conclude. I can assure you that Mr Mervyn King, the First Vice-Chair, the Second Vice-Chair coming from the European Supervisory Authorities (ESAs) and myself, together with all our fellow members of the ESRB, are fully determined to be up to the very important mission which Europe has bestowed upon the new institution. Through a very close cooperation between all member institutions we will work to deliver the pertinent risk identification and analyses and the appropriate warnings and recommendations that you have asked us to work at.

I thank you for your attention and I would like to take this opportunity to congratulate the Chairpersons of the three ESAs, who have been confirmed by this Parliament in plenary last week.