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Panel discussion on supervisory monitoring of macro-prudential risks

Introductory remarks by Francesco Mazzaferro, Head of the ESRB Secretariat, at the Risk Management Conference, 15th Euro Finance Week, Frankfurt am Main, 20 November 2012

Ladies and Gentlemen,

After reading the introductory list of questions which our moderator sent us a couple of weeks ago, I asked myself what I should concentrate on in my introductory remarks. I identified three points as particularly important.

First, I would like to talk about the European Systemic Risk Board (ESRB) as an institution and about its tasks. Then I will deal with operational aspects and give some insight into how the ESRB goes about its business, i.e. how systemic risks are discussed within the ESRB. And, finally, I will comment on the possible outputs of those discussions.

Let me start, however, with two caveats.

First, policy-makers and market players cannot really complain about a scarcity of analytical data over the last decade. However, the increasing number of reports on financial stability have not led to policy action.

Second, good supervision also depends upon a common will, among public and private institutions, to identify negative behaviours and to control incentives which lead to the build-up of vulnerabilities in the financial system over time.

The mandate of the ESRB

The ESRB, which was set up in December 2010, following a year of intense legal preparations initiated by the de Larosière report of February 2009, is a large network which links many institutions.

The ESRB brings together the entire central banking community and all of Europe’s supervisors, i.e. the three European Supervisory Authorities and the national authorities in the areas of banking, financial markets, and insurance.

The mandate of the ESRB is to identify and prioritise systemic risks in order to be able to prevent their occurrence or mitigate their effects using instruments of “soft law”, i.e. warnings and recommendations. As the law stands, the addressees of such instruments are in the public sector, i.e. governments and European and national supervisory authorities. 

Importantly, the task of identifying systemic risks is shared with the European Supervisory Authorities. The legislation provides for joint responsibility. The three supervisory authorities –the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA) – are required to share with the ESRB the results of their risk detection work, based upon regular supervisory information and judgment.

Operational aspects

At a typical meeting of the General Board of the ESRB, one third of the time is dedicated to a permanent agenda item concerning “monitoring and assessment of vulnerabilities”.

The ECB, which under an EU regulation has the task of supporting the ESRB in its analytical work, conducts a “top-down” monitoring of systemic risks. At each meeting, the ECB presents a detailed description of two or three risks which are considered both significant and policy relevant. It identifies the triggers which might lead to a systemic impact, and it formulates an assessment of their implications for the financial sector and for the economy as a whole.

The “bottom-up” monitoring is based on a combination of different analytical inputs. First, the three European Supervisory Authorities provide a joint input, which also allows evidence from the respective areas of competence to be cross-checked. Second, the ESRB Secretariat collects and assesses data on systemic risk in a bottom-up survey to which the authorities of all 27 EU Member States contribute.

The description of a meeting would not be complete if I forgot to mention that discussions are prepared in two advisory committees, the Advisory Technical Committee and the Advisory Scientific Committee. In these two committees, the risk monitoring is the subject of very detailed discussions and preparations.

Finally, a few days before the General Board meets, the ESRB Secretariat prepares an Issues Note, which aims to offer a synthesis of all the inputs received and contains suggestions for discussion on how they should be addressed in terms of macro-prudential policy.

The discussion takes place on the basis of this rich set of preliminary inputs.

Discussions outputs

The General Board meets four times per year.

Owing to the nature of the discussions, only part of the results of the discussions on vulnerabilities is made public, albeit an important part. Accountability is key in this regard, as, just like us, the general public have a direct interest in preserving the stability of the financial sector.

Immediately after the meeting, a press release and the Risk Dashboard are published. The discussions and policy conclusions then feed into the introductory statement of the ESRB Chair at the European Parliament within the framework of regular hearings.

At the latest hearing in October 2012, the ESRB Chair, Mario Draghi, emphasised three macro-prudential risks. First, the risk of setbacks in the implementation of agreed policy measures. Second, risks in the banking sector related to asset quality, profitability and funding, and the possibility that adversemacroeconomic surprises will further weaken the outlook for banks. Third, the risk that the ability of banks to supply credit to the real economy will be reduced, thereby creating a vicious circle.

Turning to non-public outputs, an important result of the discussions was the decision to set up group of experts to address specific vulnerabilities and analyse whether policy responses are warranted. The work here requires analyses, which are often supported by the use of various supervisory data.

Two such public recommendations have been issued by the ESRB since its inception. The first, in October 2011, dealt with financial stability concerns arising from foreign-currency lending to the non-financial private sector. Amongst other things, the ESRB recommended that bank supervisors require banks to hold adequate capital to cover risks associated with foreign currency lending and that supervisors ensure that banks fully account for foreign currency lending risks in their internal risk management.

The second, in December 2011, addressed risks stemming from US dollar funding of European credit institutions. The recommendation strongly urged supervisors to monitor the risks arising from currency and maturity mismatches, and to encourage credit institutions to plan for the contingency that US dollar funding dries up.

Recent intelligence that US money market funds are increasing their lending to European banks underlines the fact that our work is consciously forward-looking. Our mandate is to prevent the accumulation of excessive risks within the financial system – and our work reflects this.

The above-mentioned recommendations were forward-looking for a good reason.
The ESRB is currently considering – amongst other things – the possible need for macro-prudential action on a set of risks linked to the interplay between the funding risk of banks and the strength of sovereign borrowers, as well as to specific vulnerabilities in the shadow banking sector.

The next General Board meeting will take place on 20 December. On the same day, a press release and the Risk Dashboard will be released. Should a decision be taken to issue warnings or recommendations, these will probably be made public – if the current practice is followed – when ECB President Mario Draghi will next appear before the European Parliament in his capacity as ESRB Chair, in the first quarter of next year.


By way of conclusion, let me return to my opening caveats. While high quality systemic risk monitoring is a necessary condition to identify and prioritise systemic risks, the crucial challenge is to design policy frameworks for macro-prudential authorities which reduce the risk of inaction bias and create the right set of incentives for market participants and for the general public.

Finally, I would like to thank the organisers of this conference for their invitation and the opportunity they have given me to express my views.