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Reports of the ASC

The Advisory Scientific Committee (ASC) contributes to the public debate on macroprudential policy by publishing reports. These reports are written by ASC members, sometimes in collaboration with ESRB staff and external experts.

No. 10
11 February 2020
The global dimensions of macroprudential policy
Beck, Thorsten, Buiter, Willem, Dominguez, Kathryn, Gros, Daniel, Gross, Christian, Kalemli-Ozcan, Sebnem, Peltonen, Tuomas, Sánchez Serrano, Antonio, Portes, Richard

Abstract

Abstract

This report elucidates the risk channels for EU economies associated with international financial integration and provides an overview of the macroprudential policy options that are available to address these risks.1 It builds on the main insights from the rich academic literature developed recently to create a narrative of the role of global variables for the conduct of macroprudential policy at a national level. The report reviews the evidence on the cross-border spillovers of domestic macroprudential policies (MPPs). It also highlights key policy areas for making macroprudential policy as effective as possible. Annex 1 presents findings from several new research papers across the European System of Central Banks.

No. 9
17 June 2019
Can ETFs contribute to systemic risk?
Pagano, Marco, Sánchez Serrano, Antonio, Zechner, Jozef

Abstract

Abstract

Exchange-traded funds (ETFs) are hybrid investment vehicles that track an index or a basket of assets, combine features of open-end and closed-end mutual funds, and are continuously traded on liquid markets. They are one of the most popular financial innovations in recent decades: ETFs have grown greatly in size, diversity, scope, complexity and market significance. Drawing on the growing literature in this area, this report assesses possible channels through which ETFs may affect systemic risk. The increasing availability of ETFs can affect investors’ behaviour, by allowing them to pursue new strategies to seek return, manage risk and access new asset classes. Such changes in investors’ behaviour may in turn impact the functioning of financial markets, particularly in times of market stress. Empirical research has so far identified three effects.

No. 8
4 June 2019
Regulatory complexity and the quest for robust regulation
Gai, Prasanna, Kemp, Malcolm, Sánchez Serrano, Antonio, Schnabel, Isabel

Abstract

Abstract

Regulatory action in response to the global financial crisis, together with broader developments in finance and society, have materially expanded regulation in the financial sector. While there is a general consensus on the need for regulation, there is much less agreement on whether recent increases in the complexity of regulation are necessary and appropriate. As a result, we are seeing a strong pushback from the financial industry, which is arguing that overly complex regulation has led to financial institutions becoming overburdened, hampering their ability to provide financial services efficiently.

No. 7
1 October 2018
Approaching non-performing loans from a macroprudential angle
Suarez, Javier, Sánchez Serrano, Antonio

Abstract

Abstract

The emergence and accumulation of non-performing loans (NPLs) on banks’ balance sheets is commonly considered a microprudential issue. NPLs come to the attention of macroprudential authorities when they weaken a significant part of the financial system, threatening its stability or impairing one or more of its core functions, such as the provision of credit to the real economy. On a conceptual level, various imperfections may call for policy actions on the management of NPLs. These include unaddressed externalities, economies of scale and coordination failures, institutional distortions (stemming from the accounting, regulatory and tax treatment of NPLs or the judicial and market structures needed for their efficient resolution) and moral hazard vis-à-vis the providers of the banks’ safety net.

No. 6
11 February 2016
Too late, too sudden: Transition to a low-carbon economy and systemic risk
Gros, Daniel, Lane, Philip R., Langfield, Sam, Matikainen, Sini, Pagano, Marco, Schoenmaker, Dirk, Suarez, Javier

Abstract

JEL Classification

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

Keeping global warming below 2°C will require substantial reductions in global greenhouse gas emissions over the next few decades. To reduce emissions, economies must reduce their carbon intensity; given current technology, this implies a decisive shift away from fossil-fuel energy and related physical capital. In an adverse scenario, the transition to a low-carbon economy occurs late and abruptly. Belated awareness about the importance of controlling emissions could result in an abrupt implementation of quantity constraints on the use of carbon-intensive energy sources. The costs of the transition will be correspondingly higher. This adverse scenario could affect systemic risk via three main channels. First, a sudden transition away from fossil-fuel energy could harm GDP, as alternative sources of energy would be restricted in supply and more expensive at the margin. Second, there could be a sudden repricing of carbon-intensive assets, which are financed in large part by debt. Third, there could be a concomitant rise in the incidence of natural catastrophes related to climate change, raising general insurers' and reinsurers' liabilities. To quantify the importance of these channels, policymakers could aim for enhanced disclosure of the carbon intensity of non-financial firms. The related exposures of financial firms could then be stress-tested under the adverse scenario of a late and sudden transition. In the short-term, joint research efforts of energy experts and macroeconomists could help to better quantify macroeconomic risks and inform the design of scenarios for stress testing. In the medium-term, the availability of granular data and dedicated low-frequency stress tests will provide information about the impact of the adverse scenario on the financial system.

No. 5
5 November 2014
Allocating macro-prudential powers
Gros, Daniel, Langfield, Sam, Pagano, Marco, Schoenmaker, Dirk

Abstract

JEL Classification

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

Monetary, macro-prudential and micro-prudential policies are intimately linked. The macroprudential authority should be allocated to the body where the overall balance of synergies (between policy objectives) over conflicts and the required expertise are the largest. This report reviews the pros and cons of the four institutional models for the allocation of macro-prudential powers: (1) the government, (2) the central bank, (3) the financial authority and (4) a committee with representatives from these three bodies.

No. 4
2 June 2014
Is Europe Overbanked?
Pagano, Marco, Langfield, Sam, Acharya, Viral, Boot, Arnoud, Brunnermeier, Markus K., Buch, Claudia M., Hellwig, Martin F., Sapir, André, van den Burg, Ieke

Abstract

JEL Classification

G10 : Financial Economics→General Financial Markets→General

G20 : Financial Economics→Financial Institutions and Services→General

Abstract

Banking has grown too much in Europe - in three senses. First, the European banking system has reached a size where its contribution to real economic growth is likely to be nil or negative. Second, the European financial structure is biased towards banks (rather than securities markets), which results in excessively volatile credit creation and lower economic growth. Third, large universal banks - which perform a wide range of banking services, and are peculiarly common in Europe - contribute more to systemic risk than small and narrowly focused banks. To deal with these problems, policymakers should consider new measures such as aggressive anti-trust policy, structural reform of the banking sector, and a capital markets union to address Europe's overbanking problem.

No. 3
17 September 2013
The consequences of the single supervisory mechanism for Europe’s macro-prudential policy framework
Sapir, André, Hellwig, Martin F., Pagano, Marco, Acharya, Viral, Balcerowicz, Leszek, Boot, Arnoud, Brunnermeier, Markus K., Buch, Claudia M., van den Burg, Ieke, Calomiris, Charles, Gros, Daniel, Focarelli, Dario, Giovannini, Alberto, Ittner, Andreas, Schoenmaker, Dirk, Wyplosz, Charles

Abstract

JEL Classification

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

The European macro-prudential policy framework operates at two levels. First, the ESRB has a legal responsibility for macro-prudential oversight in the EU. Second, various national and EU authorities have responsibility for the implementation of macro-prudential policy. The creation of a European banking union is an important innovation within this two-level structure. In response to this innovation, this paper makes two key points. First, the ECB should be in charge of macro-prudential policies conferred by the Capital Requirements Regulation and Directive. Within the ECB, macro-prudential decisions should be taken entirely by the Governing Council, while micro-prudential decisions should be prepared by the Supervisory Board. Second, the ESRB remains the only EU-wide body in charge of macro-prudential supervision, responsible for all financial activities. The ESRB's effectiveness could be strengthened by creating a post of Managing Director, who would carry out the policy determined by the General Board and would be responsible to the General Board for the management of the ESRB.

No. 2
4 October 2012
A contribution from the Chair and Vice-Chairs of the Advisory Scientific Committee to the discussion on the European Commission's banking union proposals
Sapir, André, Hellwig, Martin F., Pagano, Marco

Abstract

JEL Classification

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

A European banking union is necessary to ensure the stability of the European financial system. This paper assesses the EU Commission's proposals for legislation to create a banking union in Europe. The EU Commission's proposal for a regulation creating a single supervisory mechanism is strongly supported. At the same time, a European resolution authority is essential for the credibility of the single supervisory mechanism.

No. 1
23 July 2012
Forbearance, resolution and deposit insurance
Hellwig, Martin F., Sapir, André, Pagano, Marco, Acharya, Viral, Balcerowicz, Leszek, Boot, Arnoud, Brunnermeier, Markus K., Buch, Claudia M., van den Burg, Ieke, Calomiris, Charles, Gros, Daniel, Focarelli, Dario, Giovannini, Alberto, Ittner, Andreas, Schoenmaker, Dirk, Wyplosz, Charles

Abstract

JEL Classification

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

G33 : Financial Economics→Corporate Finance and Governance→Bankruptcy, Liquidation

Abstract

The report discusses a variety of issues involving difficulties in the banking sector, with a view to ascertaining the appropriate institutional infrastructure in the context of the European Union and the euro area. Forbearance on the part of banks dealing with delinquent borrowers is problematic if it is designed as a way to game creditors and supervisors. Supervisors should not tolerate excessive forbearance; failure to intervene early tends to increase the costs of the crisis. Macro-prudential concerns should not induce the authorities to delay clean-ups of banks in difficulties. To minimise the macroeconomic fallout from banking problems and to reduce the temptation for authorities to delay and hide problems in banking, it is necessary to have a viable resolution regime that leaves room for authorities to reduce the systemic fallout from resolution. The Advisory Scientific Committee calls for the establishment of strong European bodies responsible for banking supervision and bank resolution. A European competence is necessary to ensure that cross-border concerns are given appropriate weight in supervision and resolution.