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

Introductory statement by Mario Draghi, Chair of the ESRB
Brussels, 3 March 2014

Madam Chair,

Honourable Members,

It is a great pleasure for me to appear before this Committee to report on the activities of the European Systemic Risk Board (ESRB). The economic and social costs of the recent financial crisis need no reminder. Continued progress in delivering a healthier financial system is therefore essential. The ESRB plays a key role in achieving this objective. Today, I would like to update you about on-going work at the ESRB towards this end.

Developing a framework for macro-prudential policy and making it operational

Since the start of the crisis, important steps have been taken to address the weaknesses in the financial system. On 1 January of this year, new prudential rules entered into force providing a better regulatory framework for the EU banking system. I would like to acknowledge the key role played by the Parliament in its capacity as co-legislator in achieving this milestone.

With these new prudential rules in force, the EU is well placed to implement macro-prudential policy. Making this policy operational is now the challenge ahead of us. I am therefore pleased to inform you that, since my last appearance before this Committee, the ESRB has taken major steps in meeting this challenge.

As I speak, we are posting on our website a number of documents on how authorities can use the macro-prudential instruments provided for under the new prudential rules to address risks to financial stability. We expect the authorities to find the ESRB material helpful in guiding their policy action.

Europe still needs to emerge fully from the crisis. A key contribution of macro-prudential policy is to foster the build-up of buffers and the repair of bank balance sheets. Nonetheless, the use of macro-prudential instruments may be appropriate in the near future and the ESRB material will help in their application.

There are instances of countries where there are concerns about leverage and developments in the real estate sector, and several countries have already activated macro-prudential instruments.

In the course of 2013, Sweden, for example, introduced a risk-weighting floor for mortgages and a macro-liquidity measure; the Netherlands activated a loan-to-value cap to address developments in the residential real estate sector, while in the UK, the Bank of England and HM Treasury decided to re-focus the “Funding for Lending” scheme by removing the direct incentives to expand lending to households. And only a few weeks ago, the Deutsche Bundesbank expressed concerns about the rapid development of residential real estate prices in large German cities.

The ESRB material on operationalising macro-prudential policy in the banking sector

I would now like to say a few words on the material we have just released. Let me start by pointing out that this set of documents is our third major contribution as a catalyst for developing a macro-prudential framework in the EU.

You may recall that in 2012 we issued a recommendation addressed to Member States proposing the establishment of national authorities with a macro-prudential mandate. While our assessment is still ongoing, l can already say that the recommendation triggered a wave of legislative initiatives in the Member States. At this juncture, 19 Member States have already passed macro-prudential legislation, while bills are before parliament in four others.

Last year we backed up this recommendation with another one to provide the national macro-prudential authorities with the necessary instruments to fulfil their mandate. We wanted to make sure that the authorities have the tools at their disposal to achieve intermediate objectives that ultimately contribute to financial stability. They include objectives such as preventing and mitigating excessive credit growth, leverage, maturity mismatches and risk concentrations.

The documents we are publishing today take us a step further in operationalising macro-prudential policy. A central feature of our material is a Handbook targeted at macro-prudential authorities. It offers detailed, instrument-specific advice on how to design and implement macro-prudential policies for the banking sector.

The Handbook is accompanied by a short Flagship Report aimed at high-level policy makers, providing an overview on how to operationalise the new macro-prudential instruments. We also see the Flagship Report as a useful tool for communicating on macro-prudential policy to our various stakeholders, including this Parliament, in plain language.

In the Handbook we cover the whole panoply of macro-prudential instruments, going from the countercyclical capital buffer, through real estate and liquidity instruments, to instruments that address systemic banks and structural systemic risks. We systematically review each instrument, covering the objectives to be achieved with it, how its use may affect the financial system and the economy, the indicators that can be used for its activation and deactivation, as well as various legal and institutional aspects.

The Handbook also addresses a number of important themes that cut across individual instruments, including:

• how to select the most appropriate instrument for a given risk;
• how to reduce the bias towards inaction that authorities face when confronted with immediate costs but only longer-term benefits when using an instrument;
• how to communicate to the wider public on macro-prudential policy;
• and, how to take into account the effects on other countries that the use of an instrument has.

The role of the ESRB under the new prudential rules

This last point brings me to the role of the ESRB under the new prudential rules. We have been entrusted with a number of new tasks, in addition to our general authority to issue warnings and recommendations. These tasks include providing guidance, opinions and recommendations on selected macro-prudential instruments. We are also asked to participate in the consultation on the review of the prudential rules.

We will need to build a solid infrastructure and economic framework to cope with these new demands. But here too, we are well on track.

Drawing on our membership, we have created a team that will assess the various macro-prudential policy measures to be notified to the ESRB under the new rules; this team will also assist the ESRB in preparing its opinions. To ensure consistent application throughout the EU, we are furthermore working on guiding principles to authorities for the setting of rates for the countercyclical capital buffers. I intend to update you on both initiatives when I next appear before this Committee.

Looking ahead

Madam Chair, Honourable Members, let me conclude with a brief look into the future at some key strategic challenges for the ESRB.

Our additional tasks under the new prudential rules will force us to strengthen our systemic risk and policy analysis. We will also have to strengthen our role in monitoring and guiding macro-prudential policy in the EU. At the same time we will need to examine our decision-making process to meet the tight deadlines foreseen by the legislation to provide our opinions.

I firmly believe that the new rules also provide us with a great opportunity. The ESRB can become the central hub for the collection and dissemination of information about macro-prudential policy measures in the EU. As a first step, we have already established a space on our website where we will publish all national measures that are brought to our attention in relation to our very first recommendation on lending in foreign currencies.

Thank you very much for your attention. I am now available for questions.