The conditions for efficient global and regional macro-supervision - Key success factors in international cooperation

Speech by Jean-Claude Trichet, President of the ECB, at the Eurofi G20 High Level Seminar, Paris, 17 February 2011

Ladies and Gentlemen,

I am attending the Eurofi seminar for the first time in my capacity as ESRB Chair. I have been asked – shortly after the creation of this new body in charge of macro-prudential oversight in the EU – to discuss the conditions for efficient global and regional macro-supervision. This is an ambitious task for a new institution.

These past few years have been marked by an important macro-prudential agenda. The financial crisis has encouraged authorities, academics and interest groups to search for systemic responses to systemic challenges. On both sides of the Atlantic, a new spirit – calling for a very important reinforcement of regulation and surveillance of the financial sector at the micro level, and complementing it with a “macro-prudential perspective” – has emerged. I would like to mention the discussions following the publication in the US of the Squam Lake Report and of the work done in Europe with the de Larosière report. I find it encouraging that, after only one year, legislation had been passed on both sides of the Atlantic. In Europe, the adoption by the EU council of regulations establishing the European System of Financial Supervision (including the ESRB, the EBA, the EIOPA and the ESMA) in November 2010 marked the start of a new supervisory framework. In the US, Congress passed in summer 2010 the Dodd-Frank Act, whose most important macro-prudential implications are now being transposed into regulations by the Federal Reserve.

However, it would be incomplete only to refer to the Europe - US couple. There is a macro-prudential dimension above it and beyond it. The G20 has supported the foundations for a common macro-prudential framework at global level, based, in particular, on the work of the FSB and the Basel Committee.

In Basel the fine-tuning of new instruments to take account of macro-prudential considerations has made important progress with the recent agreement on countercyclical capital buffers. The Basel Committee has also reached agreement on banks’ own funds (quality and level of capital) and on liquidity. The FSB has moved forward with initiatives concerning the identification of responses to the “too-big-to-fail” problem, as well as on the issue of executive compensation. The commitments made by the G20 governments in London and Pittsburgh in 2009 need to be honoured.

In Europe – and I speak now as ESRB Chair – the European Systemic Risk Board has now been operational for a few weeks. The European System of Financial Supervision created in November includes macro-prudential and micro-prudential overseers, meaning that the European Union is aiming at two objectives. First, it wants to establish a truly European level of oversight in the medium term. Second, it wants to ensure a dialogue between all authorities, including central banks and supervisors in the EU Member States.

The mandate of the ESRB is twofold: to prevent systemic risks and to mitigate them should they occur. The scope of our activity encompasses the single market, i.e. the entire EU, but should not exclude risks from outside the EU as well as vulnerabilities in single countries or regions that could spread.

The main instruments at our disposal belong to what I would define, quoting Pascal, as “La force de la raison”: warnings and recommendations, which supposes that these warnings and recommendations are issued by an entity which has intellectual, professional and moral authority. Recent experience shows that such instruments can be effective, but professional and moral authority can never be taken for granted. It will have to be progressively consolidated and preserved over time. It is one of the major first challenges for the ESRB.

One aspect of the “comprehensive” mandate of the ESRB is the need to look horizontally at the risks which may be generated by banks, insurance companies, occupational pension funds, securities markets, market infrastructures, and financial products generally. This is a remarkably broad mandate, in line with that of the Financial Stability Oversight Council in the US, which includes the entire sector of “non-banks”, to the extent that they have systemic characteristics.

We have only just made a start. We have established the institutions. We are at the moment calling for the interest of the academic community, in Europe and overseas, seeking their participation in the Advisory Scientific Committee. While our work in January focused mostly on procedures, we are rapidly trying to move on to regular monitoring and assessment of the risks. After the inaugural meeting of our decision-making body, the General Board, on 20 January, the Advisory Technical Committee met today in Frankfurt for the first time. Next week I will chair the first meeting of the Steering Committee, in preparation for the first regular meeting of the General Board on 18 March. We very soon want to be ready to pursue our institutional mission.

Turning to the future, the Board will have to remain alert and consider the progress made by the G-20 and its working parties in setting up consensus on the global implementation of macro-prudential principles. This concerns, for example, the translation into European law of concepts like countercyclical capital buffers and – once an agreement has been reached – instruments to address the “too-big-to-fail” issue, such as capital and liquidity surcharges, living wills and resolution mechanisms.

The G20 Presidency has also announced a focus on items that have clear macro-prudential implications, in particular, coping with excessive capital flows and continuing to improve the resilience of financial institutions.

It will be the duty of the ESRB to reflect on what these developments imply for Europe. The members of the ESRB General Board have signalled their determination to hold frank discussions on the vulnerabilities which still exist in our financial sector. It is clear that, after the financial crisis of these last four years, there can be no return to the old world of financial excesses and regulatory complacency. It is crucial that all players contribute to this joint effort. Even the best conceived regulatory work, the strongest surveillance mechanisms and the most efficient coordination rules among authorities can be no substitute for one fundamental requirement: that the financial system fully understands the risks and properly assesses them.

While displays of prudence are currently in evidence at the micro-level – in response to the recent episodes of distress – financial markets are likely, sooner or later, to be caught in impetuous upswings and will be inclined to accumulate unsustainable risks. Our duty is to ensure that, when this happens, the financial system is much better prepared in terms of resilience and risk management. We need to create a new macro-prudential culture, which will have to be applied worldwide to protect our economies and our citizens in a globalised financial system.