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

Introductory statement by Mario Draghi, Chair of the ESRB, Brussels, 9 July 2018

It is a pleasure to address you in my capacity as Chair of the European Systemic Risk Board (ESRB).

Today the ESRB is publishing its seventh Annual Report, which covers the period between 1 April 2017 and 31 March 2018. This report presents the ESRB’s risk outlook together with the underlying analysis and discusses ESRB contributions to the EU macroprudential policy framework. It also documents the follow-up to ESRB recommendations. We covered many of the topics included in the Annual Report during our previous meetings. Therefore, in my remarks today, I would like to focus on two issues. First, I would like to give you a brief update on the most recent developments in macroprudential policy at the national level. Second, moving on to macroprudential policy at the European level, I would like to highlight the main features of the recent ESRB recommendation aimed at addressing liquidity and leverage risks in investment funds.

When we met last November, I noted that four EU macroprudential authorities, as well as the authorities in Norway and Iceland, had decided to activate the countercyclical capital buffer. Since then, decisions to set a positive buffer rate have also been taken in Lithuania, Denmark, France and, most recently, Ireland. As a result, there are now ten ESRB member countries[1] that have decided to enhance the resilience of their banking sector, with the applied buffer rates ranging from 0.25% to 2%. I consider this situation to be the new normal; given that the characteristics of financial systems and financial cycles vary across countries, as do the risk preferences and tolerance of authorities, we expect that a subset of authorities will be using this instrument at any one time.

Let me turn to another area which has traditionally been a focus of our activities, namely real estate. We observe that national authorities continue to be very active as regards residential real estate; a large majority of Member States have at least one measure in place to target vulnerabilities in this sector. Many countries combine instruments to increase the resilience of lenders with instruments targeting collateral or borrowers. The General Board has just discussed analytical findings as regards financial stability issues relating to the commercial real estate sector and we will publish a report on this in the coming months. I hope to update you on this at our next meeting.

Regarding our work on the investment fund sector, you may recall that a year ago I mentioned to this Committee a number of risks that could stem from the growing role of investment funds in financial intermediation. The ESRB considered liquidity risks and risks associated with leverage to be particularly important. In February this year the ESRB issued a recommendation to address these financial stability concerns. The recommendation is directed at two ESRB member institutions: the European Securities and Markets Authority (ESMA) and the European Commission. The ESRB sees the need for ESMA to provide supervisory authorities with guidance on applying the macroprudential elements already existing in the regulatory framework. However, the regulatory framework also needs to be enhanced, and to this end it is recommended that the European Commission propose some new legislative initiatives.

Our first concern stems from the fact that the set of liquidity management instruments available to investment funds varies substantially across the EU. Liquidity management instruments, such as redemption gates or redemption fees, are important as they help managers to deal with redemption pressures in stressed liquidity conditions. While the ESRB doesn’t want to impose the use of certain instruments on investment funds, we do want to ensure that the same set of tools is readily available in all Member States.

Second, the ESRB identified a need to enhance the liquidity stress testing culture among investment funds. To this end, we recommended that ESMA develop further guidance on how fund managers should carry out such stress tests. We also recommended that open-ended alternative investment funds managing assets that are inherently less liquid should demonstrate to supervisors that their investment strategy could be maintained under stressed market conditions.

Third, we were aware that while supervisors had the possibility to restrict the use of leverage by alternative investment funds, they were not making use of this tool. It is important that the lack of guidance on the design of the limits does not create an inaction bias. The ESRB therefore recommended that ESMA develop such guidance.

Finally, we found that the lack of a harmonised reporting framework across Members States is an obstacle to the monitoring of undertakings for collective investment in transferable securities, or UCITS. The ESRB thus recommended that the European Commission put forward a legislative proposal for an EU-level reporting framework.

We encourage the addressees of our recommendation to implement it swiftly. We stand ready to support them in this task and hope that the European Parliament will play its part in the legislative processes. In parallel, we will continue monitoring developments in the investment fund sector and in the broader shadow banking sector to assess the trends that underpin our policy actions. As part of this process, the General Board has just discussed the third edition of the EU Shadow Banking Monitor, which will be published in September.

I would like to conclude by saying that we were pleased to welcome Ms Pervenche Berès and Mr Burkhard Balz, a delegation from this Committee, at the last ESRB General Board meeting. We hope that this tailor-made form of democratic accountability will benefit Ms Berès and Mr Balz in their work on the review of the ESRB founding regulation.

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

[1]Czech Republic, Denmark, Norway, France, Iceland, Ireland, Lithuania, Slovakia, Sweden and the United Kingdom.