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

Speech by Christine Lagarde, Chair of the European Systemic Risk Board, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

Brussels, 4 December 2024

It is a pleasure to address you in my capacity as Chair of the European Systemic Risk Board (ESRB). In my remarks today, I would like to highlight a critical aspect that is emerging in the current policy debate.

The memories of past financial crises – and of the profound consequences they had for our societies – are fading. And the benefits of the EU’s regulatory framework are increasingly being called into question, or even portrayed as an obstacle to growth. The uncertainty surrounding regulatory developments in other parts of the world is fuelling this narrative.

We must not forget that financial stability is a prerequisite for sustainable growth. Only a stable and resilient financial sector can truly support innovation, competitiveness and growth in the EU. And stability and resilience need a robust microprudential and macroprudential framework. Your Committee plays a crucial role in this endeavour, and there is important work still to be done.  

Let us consider this from the perspective of the capital markets union. This project is indispensable for the much-needed transformation of the EU economy. The EU needs to mobilise a vast amount of private savings to meet the challenges arising from climate change, an ageing society, deglobalisation and a war raging at our borders. To achieve this, we need capital markets that are better developed and less fragmented, making it easier and more attractive for our citizens to invest in the EU. We need to bring savers and innovators together to fulfil our potential.

More integrated capital markets are likely to accelerate the growth of non-banks in our financial system. This can support diversification and reinforce financial stability. At the same time, however, there is growing evidence that vulnerabilities in non-bank financial intermediation can be both a source and an amplifier of shocks. We cannot risk the capital markets union causing a new financial crisis. This would derail the project altogether.

So, tangible progress towards the capital markets union and the resilience of all nodes in the financial system – banks, non-banks and the markets where they interact – are closely linked. And to ensure this resilience, three things need to happen.

The EU needs to tackle gaps in the regulatory framework for non-banks. I have discussed these gaps with your Committee on various occasions. Vulnerabilities in money market funds are one of the areas requiring urgent regulatory action. Money market funds perform liquidity transformation and are therefore vulnerable to investor runs. Moreover, some types of EU money market funds have features that can incentivise such runs. We should remove those features.

The EU also needs to pursue a truly system-wide approach to better identify, analyse and respond to ever-changing systemic risks. Such an approach needs to combine two perspectives. One is the traditional perspective of looking at different types of entities such as banks, insurers and investment funds. The other considers the different activities that both banks and non-banks engage in, such as lending, market making or asset management. This system-wide approach also needs to be reflected in regulation to prevent activities and the associated risks from migrating outside of the regulatory perimeter. To implement this system-wide approach, we need better data and we need to improve how we share these data across authorities. I highlighted this issue in a letter sent to your Committee this past summer.

And the EU needs to give the European Supervisory Authorities the means to deliver a system-wide response, when required, including through direct supervisory powers. More integrated capital markets mean that systemic risks will transcend borders even more than is currently the case. This will challenge existing cooperation models between authorities. There are different ways to foster cooperation, but ultimately, truly system-wide risks require a truly system-wide response, with a single authority taking the lead.

We set out these points in more detail in a report published by the ESRB today. This report is our response to the Commission’s consultation on macroprudential policy for non-bank financial intermediation. It also sets out a broader, decidedly ambitious agenda, including topics that were not raised in the consultation, because we want to ensure that the EU’s macroprudential framework keeps pace with an ever-evolving financial system. Commissioner Maria Luís Albuquerque has already highlighted the importance of financial stability for sustainable growth before this Committee. And you – members of the ECON Committee – have an important part to play in developing an EU regulatory framework that is robust and fit for the future.

I am looking forward to our exchange of views.