Claudia Buch: Public hearing on the Review of the EU
MacroPrudential Framework - panel discussion
Statement by Prof Claudia Buch, Deputy President of the Deutsche Bundesbank, at the public
hearing on the Review of the EU Macro-Prudential Framework - panel discussion, European
Commission, Brussels, 7 November 2016.
* * *
1. Overview
After the financial crisis, macro-prudential policy has been established as a new policy area with
the mandate to ensure the stability of the financial system as a whole and to prevent systemic
risks building up. Systemic risks in financial systems arise if distress in one institution or a group
of financial institutions threatens the functioning of the entire financial system. Resilience of the
financial system with regard to systemic stress thus requires buffers which take these
externalities into account.
Experience with macro-prudential policies is limited though, which requires a continuous
monitoring of the progress that has been made. The consultation process that has been
launched by the European Commission on the macro-prudential framework is a key element of
monitoring the effectiveness and efficiency of macro-prudential institutions.
Effective macro-prudential policies are particularly needed at the European level, given the close
real and financial linkages between member countries of the European Union (EU). Effective
macro-prudential policies require an institutional set-up with three key characteristics. First, the
institutional set-up should allow tracking potential risks to financial stability. Second, it should
clearly assign responsibility for the use of macro-prudential instruments. Third, it should allow for
the effective coordination between institutions tasked with macro-prudential mandates. In this
regard, the European Systemic Risk Board (ESRB) has a critical function. Maintaining its current
strength and improving its institutional set-up, where needed, should thus be a priority.
Maintaining and strengthening the role of the ESRB gives rise to questions concerning its
mandate and its role as well as the organizational structure and the institutional links with
the ECB. When the ESRB was established, the ECB did not have the role of a micro-prudential
banking supervisor nor did it have macro-prudential responsibilities in the banking sector. This
has changed with the Banking Union and the establishment of the Single Supervisory Mechanism
(SSM). Therefore, potential changes in the ESRB's organizational structure and its ties to
the ECB should reflect the ECB's new role in the SSM.
Overall, the ESRB's mandate is appropriate and its role is essential in coordinating and
assessing macro-prudential policies for the whole EUfinancial market. However, there are three
areas in which the efficiency and effectiveness of the ESRB could improve:
1. The ESRB has a comparative advantage in analyzing and addressing macro-prudential
issues that involve the cross-border and cross-sectoral dimension. Therefore, one might
strengthen the ESRB's capabilities to focus on these issues.
2. The coordination and notification requirements that are in place right now are overly
complex. Hence, it should be considered to establish the ESRB as a central hub for
notifications concerning macro-prudential instruments that also harmonizes procedures.
This may, for instance, include a single EU-wide platform for notification procedures which
currently does not exist.
3. The ESRB provides a valuable platform for the exchange of experiences in macro-prudential
policy making. In order to enhance this role, the ESRB could act as a hub for the ex-post
evaluation of macro-prudential policies by coordinating analytical work. It could set up
dedicated working groups and ensure high-quality output by coordinating peer-reviews of the
evaluation.
Successfully improving the operations of the ESRB and strengthening its capacities has two
important prerequisites. First, The ESRB would need more own resources to build up
independent analytical capacities mainly to identify, to propose and to coordinate joint analytical
efforts, thereby reducing the current dependence on ECB's resources. Cooperation with the
1
European Supervisory Authorities (ESAs) should be intensified in order to enhance its
crosssectoral analytical capacities. Second, the ESRB needs access to relevant data and information
and data sharing among members has to be facilitated.
2. Mandate and Role of the ESRB
The macro-prudential supervisory architecture of the EU was established right after the financial
crisis, while the macro-prudential architecture of the Euro Area was significantly overhauled with
the establishment of the Banking Union in 2014. At the EU level, the ESRB has been in place as
an integrated financial supervisor for macro-prudential supervision since 2011. The ESRB's aim
is to identify systemic risks in the financial system and to propose measures to eliminate them,
employing warnings and recommendations, which are subject to a 'comply or explain'
mechanism. Mandates for macro-prudential policies lie at the national level. However, with regard
to specific macro-prudential measures, the ECB has asymmetric intervention powers: according
to Article 5 of the SSM Regulation, the ECBmay - after consultation with the national supervisory
authorities - tighten macro-prudential measures enshrined in the CRD IV but not ease them.
Cross-border and cross-sectoral surveillance
Given the importance of national risk factors and institutional specificities that affect systemic
risks, surveillance of systemic risk has a strong domestic component. Thus various authorities,
in particular central banks, which traditionally maintain capacities for a holistic analytical view
combining cross-sectoral views with micro- and macroeconomic analysis, contribute to
macroprudential surveillance through the ESRB.
At the same time, domestic (macro-)prudential policies spill over across borders through the
activities of internationally active banks and other financial institutions. Current research
conducted by the International Banking Research Network (IBRN), for instance, shows that
2
prudential instruments often spill over across borders through bank lending. At the same time,
international spillovers vary across prudential instruments and are heterogeneous across banks.
Bank-specific factors like balance sheet condition and business model drive the amplitude and
direction of spillovers to lending growth rates. Accounting for bank-level heterogeneity is thus
crucial for understanding the effects of prudential policies. In the past, international spillovers of
prudential policy on loan growth rates have not been large on average, but have the potential to
grow with broader use of macro-prudential instruments.
Hence, macro-prudential policies and institutions are inherently complex because they involve
authorities taking cross-sectoral perspectives (banking, insurance, other financial intermediaries
and financial market infrastructures), micro- and macroeconomic perspectives, and
crosscountry perspectives. There is, thus, no single institutional set-up for the organization of
3
macroprudential policies and the assignment of powers. Generally though, central banks play an
important role in macro-prudential policies across countries, reflecting their expertise in analyzing
macroeconomic, system-wide developments in the financial sector and the real economy. The
current institutional set-up of the ESRB reflects these different perspectives, and the ESRB has
been effective in coordinating these perspectives across European countries.
The ESRB as a body of independent experts provides a forum to openly discuss
macroprudential issues from different angles. It brings together the perspective of micro- and
macroprudential authorities that, as a group, cover the respective national financial systems, together
with ESAs and the ECB the European financial system. Therefore, National Competent Authority
(NCA) and National Designated Authority (NDA) - the micro- and macro-prudential authorities,
respectively - should be represented in the General Board. However, the composition should be
flexible enough to reflect the different institutional set-ups and the division of labor at the national
level. In some member states the national mandate for macro-prudential oversight is split
between the NDA and the national central bank (NCB) - Germany might serve as an example -
which, due to their analytical capacities, are responsible for the surveillance of systemic risks. In
other member states the national central bank is the NCA/NDA.
Any change in the composition of the Board should, therefore, do justice to the country-specific
set-up. Otherwise, the ESRB would run the risk of losing access to the independent analytical
capacities of central banks in several member states. The General Board should continue to
include representatives from all ESCB central banks. If there are more than two authorities in one
Member State, i.e. if NCB, NDA and NCA are distinct authorities, a mechanism similar to Article 6
(2) lit. a) ESRB Regulation may be chosen. In particular, if NCB and NDA are the same authority,
the NCAhas the second seat.
Accountability and Decision-Making
While macro-prudential policy in Europe clearly has a cross-border (and cross-sectoral)
dimension, it yet takes place in a context of national sovereignty and subsidiarity. This implies
that macro-prudential authorities remain accountable to their national electorates, and this
national accountability needs to be reflected in the institutional set up of macro-prudential
policies. Both, the factors contributing to systemic risks and the costs of potential financial
crises, have a strong national component. Costs of financial crisis are largely borne at the
national level. Financial stability risks are affected by various factors which have a strong national
component such as regional imbalances and national laws.
The financial sectors of EU member states differ substantially, and national characteristics need
to be considered in setting up surveillance mechanisms and regulatory interventions. Therefore,
and against the background of the Single Rule book, it is important to give sufficient national
discretion and flexibility to national macro-prudential authorities when it comes to the actual use
and calibration of instruments.
At the same time, national authorities may be subject to political pressure. They are at risk of
acting too little or too late in addressing risks to financial stability. In order to alleviate the inaction
bias in macro-prudential policymaking, asymmetric powers are needed. "Top-up powers" thus
have an important role in addressing the risk of inaction and potential spill-overs of insufficient
(from the Euro area perspective) action taken at the national level.
Ensuring timely policy decisions to be taken that reflect cross-border spillovers does not require
"scale-down" powers. Instead, they raise two main concerns on their own right. First, the main
goal of macro-prudential policies is to increase resilience and to internalize systemic-risk
externalities, not to manage the financial cycle. Scaling down powers may run against these
objectives. If capital buffers of banks are reduced, resilience of the financial sector in times of
crises is weakened. Second, inaction bias or the risk of taking policy decisions which not
adequately respond to systemic risk are not only concerns at the national level. Centralized
decisions might also be inadequate, and the potential effects could be larger than those of
misjudgement at the national level.
The current federal structure of asymmetric powers strikes an appropriate balance between
national and European interests, and it seems well-suited in the EU context. It allows the "center"
to act against inaction (or, from the perspective of the EU, insufficient action) at the national level
in order to safeguard Euro Area-wide financial stability. And it also allows the member states to
self-insure against inaction or insufficient action at the level of the ECB in order to safeguard
national financial stability.
Overall, it is thus difficult to make the case for a further centralization of macro-prudential policy
within the Euro Area (i.e. the SSM) or within the European Union. This applies to coordination of
macro-prudential policy beyond the existing harmonized framework, the common rules for
reciprocation, and the work of the ESRB. Instead, before any further centralization of
macroprudential policy-making is being considered, it should be carefully assessed which specific
measures and sectors would benefit from a harmonized approach, taking into account the
structural and regional diversity of the financial system in Europe to date.
3. Strengthening the Role and the Independence of the ESRB
Given the importance of the ESRB in addressing cross-country and cross-sectoral risks to
financial stability, measures can yet be taken to strengthen its role and independence.
Resources: Currently, the ESRB depends on ECB resources without clearly specifying financial
and organizational arrangements between the two institutions. This has the potential advantage
of affording flexibility, but experience shows that clarifying roles and responsibilities could
increase effectiveness and efficiency. Ideally, the ESRB should have resources that are
independent of the ECB. In addition to providing clarity with regard to institutional structures, this
may enhance independence of the ESRB in voicing potential issues concerning the ECB and
the SSM. Unlike today, this issue was of no concern at the time when the ESRB was established
as the ECB had not assumed the role of a micro-prudential banking supervisor and had no
macro-prudential competencies.
Moreover, the cross-sectoral orientation of the ESRB could be strengthened. At the same time, a
closer cooperation with the ESAs is warranted in order to foster the cross-sectoral analytical
capacities, risk analysis beyond banking and in order to ensure that relevant financial stability
risks identified by the sectoral supervision authorities are covered. In particular, it is proposed
that the ESAs support both the secretariat and the analysis section of the ESRB by transferring
additional staff to the ESRB.
The visibility of the ESRB and its ability to contribute the macro-prudential perspective
in EU policy-making could be enhanced by creating the position of a Managing Director besides
the ESRB chair. While the ESRB chair would continue to preside the General Board, the
Managing Director could represent the ESRB in the public or in EU committees. This could
enhance the credibility, ownership and visibility of the ESRB as a body with a clear
macroprudential mandate. Particularly, it would strengthen its ability to address warnings and
recommendations to financial supervisors. Additionally, the establishment of a Research Director
(or Chief Economist) might additionally steer the ESRB's analytical power towards issues of
value added.
Data: In conducting system-wide risk analysis, the ESRB largely relies on ECB resources as
well. In order to make use of its own comparative advantage and to deliver analyses of value
added, the ESRB and its working groups need to have access to relevant data and information.
Hence, improvements could be made to data exchange procedures, especially with regard to
data that are already available in other authorities (ESAs, SSM or at the national level).
Procedures for data access should be streamlined. In this context, it would be useful to review
4
Article 15 (6) and (7) of the ESRB Regulation. In case of data gaps that restrain the ESRBin
fulfilling its mandate, the ESRB should, first of all, rely on its powers to issue warnings or
recommendations asking the respective ESAs or national authorities to close those data gaps.
Improving resources and data access would also strengthen the ESRB as a hub for the ex-post
evaluation of macro-prudential policies. More specifically, the ESRB could coordinate analytical
work for the evaluation of specific policies (e.g. by setting up dedicated working groups) and
ensure high quality output by coordinating peer-reviews of the evaluation.
1
The respective ESAs are the European Banking Authority (EBA), the European Insurance and Occupational
Pensions Authority (EIPOA) and the European Securities and Markets Authority (ESMA).
2
For details, see "Cross-Border Prudential Policy Spillovers: How Much? How Important? Evidence from the
International Banking Research Network" (2016), Claudia M. Buch (Deutsche Bundesbank) and Linda Goldberg
(Federal Reserve Bank of New York) (mimeo). The International Banking Research Network (IBRN) was
founded in 2012 to inform, both the academic and the policy debate, on current issues related to international
banking. It is a multi-country initiative, bringing together research teams from 25 central banks, the International
Monetary Fund (IMF), the Bank for International Settlements (BIS), and the European Central Bank (ECB). The
current list of participating central banks and institutions as well as country studies are available at
www.newyorkfed.org/IBRN/index.html.
3
For a recent review of country-specific experiences, see International Monetary Fund (IMF), Financial Stability
Board (FSB), Bank for International Settlements (BIS) (2016). Elements of Effective Macroprudential Policies:
Lessons from International Experience. www.fsb.org/wp-content/uploads/Elements-of-Effective-
Macroprudential-Policies1.pdf.
4
See also p. 15-17 of the report of the High-Level Group on the ESRB Review, March 2013, available at:
www.esrb.europa.eu/pub/pdf/other/130708_highlevelgroupreport.pdf?e913faa529f509c934cd484435ad13a8