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

Introductory statement by Mario Draghi, Chair of the ESRB
Brussels, 8 July 2013

Dear Madam Chair,

Dear Honourable Members,

I am pleased to appear before this Committee today to inform you about the recent activities of the European Systemic Risk Board (ESRB) and to present the 2012 ESRB Annual Report. In my remarks I will focus first on the contribution of macro-prudential policy to fostering a resilient and growth-supporting financial system; I will then move on to the ESRB’s work laying the foundations for a framework for macro-prudential oversight in the European Union; and I will conclude on efforts towards greater transparency and accountability of the ESRB.

Fostering a resilient financial system that supports growth

Macro-prudential policy has an important role to play to ensure financial stability. Now that many new macro-prudential bodies are being set up, in line with the end-December 2011 ESRB recommendation, authorities in the European Union have already started to use macro-prudential policies to address vulnerabilities in banks, non-banks and financial infrastructures and to foster a more resilient financial system that can support the economy.

I would like to provide four examples within the European Union, namely, in Spain, Italy, the Netherlands and the United Kingdom

In Spain, the Banco de España is confronted with the need to ensure that progress with strengthening the banking sector continues. To do this, it has recommended that credit institutions limit dividend distributions and ensure at all times an adequate level of capitalisation.

In Italy, the Banca d’Italia is ensuring that the levels of provisioning by credit institutions remain in line with the levels of non-performing loans, which continue to rise in the current sluggish macroeconomic environment. To minimise the procyclical effects of the interventions, the Banca d’Italia called on the banks to increase their internally generated resources by further curbing operating costs, dividends and executives’ and directors’ compensation, and – if needed – by selling non-strategic assets.

In the Netherlands, household indebtedness has been identified by the authorities as having reached excessive levels. Therefore, the authorities mandated in 2012 a decrease in loan-to-value ratios by one percentage point per year. In addition, banks judged to be systemically important to the Dutch economy will be required to build up an extra capital buffer of 1-3 percentage points from 2016 onwards.

In the United Kingdom, the authorities seek to enhance market confidence in the resilience of the banking sector. To this end, the Bank of England’s Financial Policy Committee (FPC) has already made recommendations to ensure that the capital of UK banks and building societies reflects a realistic and prudent assessment of their asset value, future misconduct-related legal costs and risk weights. The Prudential Regulation Authority (PRA) was asked to ensure that any ensuing additional capital requirements would be met by issuing new capital or restructuring balance sheets in a way that did not hinder lending to the real economy. As part of its work in relation to the FPC’s recommendations, the PRA announced measures to contain leverage in major banks. The FPC recently also clarified how UK banks are to transition to a full compliance with liquidity regulatory requirements.

As macro-prudential actions are likely to become more frequent, both outside and within Europe, the ESRB will have an important role in discussing such actions with a view to fostering common elements in the policy stance of authorities, including with regard to the need for further tightening or mitigating action. This might be expressed in policy recommendations to national authorities and also to the Single Supervisory Mechanism, when it has taken on its macro-prudential functions.

Building a sound framework for macro-prudential oversight

Let me now turn to the work done at the ESRB to lay the foundations of a policy framework for macro-prudential oversight in the European Union. Let me recall two milestones in this important work. In our Recommendation on the macro-prudential mandate of national authorities of end-December 2011, we provided a list of principles that should guide authorities in developing such mandates. Following this Recommendation, Member States have started setting up dedicated macro-prudential authorities. The deadline was the end of June this year.

As you know, ESRB recommendations are not binding. However, experience shows that they may set policy processes in motion. Without prejudice to the final assessment by the ESRB General Board on whether action taken at the national level is in line with the ESRB Recommendation, I am pleased to report that in ten Member States (Bulgaria, the Czech Republic, Denmark, Germany, Greece, Latvia, Malta, the Netherlands, Slovakia and the United Kingdom) new national legislation or other measures to establish a national macro-prudential authority have recently entered into force. In seven other countries (Austria, France, Hungary, Ireland, Lithuania, Romania and Slovenia), legislation is with parliament for discussion and hopefully prompt approval. Eleven other countries are preparing the relevant provisions within government (Belgium, Croatia, Cyprus, Estonia, Finland, Italy, Luxembourg, Poland, Portugal, Spain and Sweden). The ESRB is collecting all necessary information to assess compliance with its Recommendation.

The first recommendation on the national macro-prudential mandates was followed in April this year by a Recommendation on intermediate objectives and instruments of macro-prudential policy. In this Recommendation we identify a number of intermediate policy objectives for safeguarding the stability of the financial system. We also provide an indicative set of instruments that should be at the disposal of national authorities to achieve these intermediate objectives.

I welcome the approval of the revised capital requirement rules for banks and investment firms. Indeed, the so-called CRD IV/CRR provides a number of concrete macro-prudential instruments such as the countercyclical capital buffer, the systemic risk buffer and the buffer for systemically important financial institutions that will soon be part of the standard toolkit of national authorities.

The new capital framework also provides for various roles for the ESRB: in some cases, the ESRB just needs to be notified, for example about the identity of systemically important institutions; in other cases, the ESRB plays a more active role, by providing guidance, opinions and/or coordination.

At the ESRB, we want to be ready as of January 2014 for the new roles that the CRD IV/CRR has allocated to us. At the same time, we want to assist the national macro-prudential authorities in using new instruments by providing them with an operational framework that can effectively guide them. Over the past weeks, we have therefore initiated various work streams on dedicated macro-prudential instruments and I expect that by the end of the year we will have achieved substantial progress in providing an operational framework to help macro-prudential authorities use their new macro-prudential tools.

Moving towards greater transparency and accountability

Let me now turn to three documents that the ESRB published today, which are a testament to the ESRB’s continuous efforts to move towards greater transparency and accountability in the implementation of its mandate. Let me begin with the 2012 Annual Report.

As part of the ESRB accountability framework, the Annual Report gives a faithful account of the ESRB’s activities during its second year of existence. As you have all received this report, I will refrain from going into any detail. But let me just highlight one feature of this year’s report, namely that it paints a comprehensive picture of the ESRB’s assessment of systemic risks and related policy responses to mitigate these risks.

In addition, the Annual Report gives an overview of action taken by the ESRB to ensure implementation of its recommendations. ESRB recommendations are “soft tools” accompanied by an “act or explain” mechanism. This means that the addressees have to: (i) communicate to the ESRB (and to the EU Council) the actions taken in response to the recommendation; or (ii) provide the ESRB with adequate justification for their inaction.

Identifying the dividing line between “compliance”, “adequate justification of inaction” and “non-justified inaction” is a delicate exercise. To ensure that this assessment is based on transparent and predefined rules, the ESRB published today a “Handbook on the follow-up to ESRB recommendations”. The Handbook is currently being used to assess compliance with the ESRB Recommendation on lending in foreign currencies (the first recommendation issued by the ESRB in September 2011). This assessment is expected to be completed by the end of the year.

Let me conclude on the forthcoming review of the ESRB. In October 2012 I informed you that a Group composed of three members of the ESRB Steering Committee ^[1]would examine the functioning of the ESRB, also in view of the forthcoming banking union. Today, the ESRB published the Group’s report that focuses on three main areas: the scope for streamlining the legislation establishing the ESRB; second, further strengthening the way in which the ESRB operates; and third, possible implications of the establishment of the Single Supervisory Mechanism for the functioning of the ESRB.

The report was discussed by the ESRB General Board on 20 June and has been transmitted to the Chair of this Committee, the President of the ECOFIN Council and the Vice-President of the Commission, together with a letter conveying the thrust of the General Board discussion. Broadly, the General Board suggests not to introduce fundamental amendments to the legislation establishing the ESRB; it however supports to make the ESRB mandate more specific so as to focus it on medium-long term threats to financial stability and on cross-financial sector vulnerabilities, also to delineate its mandate more precisely from that of other bodies and in particular the Single Supervisory Mechanism.

Thank you very much for your attention.