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

Introductory statement by Mario Draghi, Chair of the ESRB, Brussels, 28 January 2019

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

This is our last meeting in this parliamentary term. I would like to use this opportunity to reflect on what we have achieved in the macroprudential policy area, highlight the main findings of the ESRB report on macroprudential approaches to non-performing loans, which is being published today, and discuss the challenges that lie ahead of us.

The ESRB plays an important role in supporting successful macroprudential policy in Europe. First, it provides a forum to collectively discuss emerging risks and vulnerabilities. Second, it allows authorities to learn from each other by sharing their experiences of using macroprudential instruments. And finally, it assesses macroprudential actions taken across the EU and makes use of its own soft law instruments – warnings and recommendations – to mitigate any potential inaction biases.

It was only at the beginning of this parliamentary term that the macroprudential authorities were given access to the necessary macroprudential tools, as a result of the regulatory response to the global financial crisis. During our meetings we have discussed how the authorities are using these tools to address emerging risks, also in response to the ESRB’s recommendations and warnings on vulnerabilities in the EU residential real estate sector. The macroprudential authorities are willing to use the available policy instruments and are activating them in a targeted manner, which reflects the cross-country heterogeneity of vulnerabilities. For instance, the systemic risk buffer has been used to address structural risks in 12 EU Member States^[1] (as well as in Iceland, Liechtenstein and Norway). There are currently seven countries^[2] with an active countercyclical capital buffer (ranging between 0.5% and 2%) and a further five countries^[3] will see a positive rate for the first time in the next 12 months (with ranges between 0.25% and 2.5%). Moreover, in the majority^[4] of EU countries, macroprudential authorities have actively used borrower-based instruments available under the national frameworks to ensure sound lending standards and to mitigate risks related to household indebtedness. This brings me to the ESRB report on macroprudential approaches to non-performing loans (NPLs).

Let me first briefly recap the main financial stability considerations around NPLs. NPL emergence and accumulation becomes a systemic problem when NPLs affect a substantial portion of the financial system, decreasing its resilience to shocks or impairing its core function of facilitating financial intermediation. Given the ESRB’s mandate and its previous work on resolving NPL issues in the EU^[5], the Council of the EU asked the ESRB to develop “macro-prudential approaches to prevent the emergence of system-wide NPL problems (…)”.^[6]

In the report^[7], which the ESRB is publishing today, we conclude that the macroprudential authorities already have the necessary tools to address the vulnerabilities discussed. The ESRB particularly welcomes the recently agreed changes to the macroprudential buffer framework, which are expected to further increase the flexibility of the systemic risk buffer and equip the macroprudential authorities with a targeted instrument to address pockets of vulnerabilities in specific market segments or for specific groups of borrowers.

At the same time, the ESRB has identified areas where further work is needed. I would like to highlight some of these, starting with the borrower-based measures. In a nutshell, borrower-based measures, such as caps on loan-to-value and loan-to-income ratios, impose minimum lending standards. Borrowers are therefore prevented from overburdening themselves with high leverage, and therefore become less vulnerable to economic and financial shocks. These measures also increase the resilience of banks and restrict the quantity of credit (relative to the value of collateral or the borrower’s income), thereby helping to mitigate excessive credit growth. In this way, they target vulnerabilities at an early stage.

As I have already mentioned, borrower-based measures are being used to target lending to households in a majority of Member States. The ESRB believes that these tools should be part of the macroprudential toolkit available to all macroprudential authorities, which is currently not the case. Furthermore, given the benefits of these measures, the ESRB believes that the possibility to expand them to borrowers other than households, namely to non-financial corporations, should be further explored. At the same time, we fully acknowledge the challenges of such an exercise, which stem from the heterogeneity of non-financial corporations (in terms of size, sector and age) and of the loans granted to them.

I must highlight that some of the vulnerabilities and structural factors underpinning the potential NPL issue, such us inefficiencies in legal and judicial frameworks or bank governance, fall outside the scope of macroprudential policy. Nevertheless, they determine the circumstances in which macroprudential policy operates. It is therefore important to address any remaining inefficiencies in legal and judicial frameworks that still exist in some Member States.

Let me now turn to the challenges ahead of us. Given that a growing share of credit intermediation is conducted by non-bank financial institutions, Europe should equip macroprudential authorities with the appropriate tools to act in case existing risks migrate outside the banking sector or new risks emerge. For this reason, in this Committee I have often discussed the ESRB’s strategy and priorities for expanding macroprudential policy beyond banking. During our meetings we discussed our proposals for revising the European Market Infrastructure Regulation (EMIR). Last time we met, I highlighted proposals regarding macroprudential tools for insurers. The wider toolkit should also include macroprudential instruments for dealing with liquidity risk and risks associated with leverage among some types of investment fund. Unfortunately, and here I must be frank, no significant progress has so far been made on incorporating macroprudential tools for non-banks into the EU legal framework.

Another challenge ahead of us is related to monitoring the financial system, which requires us to have access to high-quality, detailed and granular transactions data. To have the full picture, it is vitally important that we can link data across markets, instruments and counterparties. Our experience in analysing derivatives data that have become available through EMIR highlights the importance of greater data standardisation, including at the global level, building on the successful use of the Legal Entity Identifier. It also shows that policymakers need to invest in adequate infrastructure and analytical tools.

I would like to conclude by thanking this Committee, and in particular its Chair and Vice-Chairs, for the excellent cooperation over the past years and the fruitful exchanges not only here but also during our statutory in camera meetings. I am particularly glad that you brought two issues to our attention, namely the financial stability implications of climate change and the International Financial Reporting Standard 9. The ESRB’s work resulted in publications which have become a reference point for policy discussions in these areas. The ESRB and its member institutions continue to work on the financial stability aspects of climate change, and I hope to be able to update you on this during our future meetings. At your request, we will also work on the financial stability implications of International Financial Reporting Standard 17 regarding insurance contracts. In this parliamentary term we were also pleased to welcome Ms Pervenche Berès and Mr Burkhard Balz, a delegation from this Committee, at one of the ESRB General Board meetings. I hope this has facilitated your work on the review of our founding regulation.

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