Vítor Constâncio: The establishment of the European Systemic Risk
Board - challenges and opportunities
Introductory remarks by Mr Vítor Constâncio, Vice-President of the European Central Bank,
at the Eurofi Financial Forum plenary session 14 on "Implementing the de Larosière Agenda",
Brussels, 29 September 2010.
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The European Systemic Risk Board (ESRB) will be established in January 2011 as the body
responsible for the macro-prudential oversight of the EU financial system. It is mandated to
actively monitor the various sources of risk to financial stability in the EU - across Member
States and financial sectors - with due consideration of also global developments. It should
identify the risks and assess how they could impact the financial system so as to prioritise
them. In this context, systemic risk is defined in legislation on the ESRB as "a risk of
disruption in the financial system with the potential to have negative consequences for the
internal market and the real economy." The ESRB should issue warnings on significant
systemic risks and issue recommendations for policy action to address such risks.
The creation of the ESRB is a response to one of the key lessons of the financial crisis
regarding the need for an enhanced macro-prudential oversight of the financial system as a
new policy function. The value added of a macro-prudential function to safeguard financial
stability is its focus on detecting, assessing and addressing vulnerabilities that arise from the
interconnections between financial institutions and markets, as well as from macroeconomic
and structural developments, including financial innovation. It will thus take a system-wide
perspective, which will complement micro-prudential supervision, whose purpose is to
assess the soundness of individual financial institutions.
The design of a framework for the conduct of macro-prudential oversight as new policy
function involves significant challenges, but also represents a unique opportunity for
reinforcing the arrangements to safeguard financial stability. In particular, the following three
main components should underpin a macro-prudential framework:

first, the necessary conditions for an enhanced monitoring of the financial system as
a whole, in order to identify potential threats to financial stability;

second, the instruments for translating financial stability assessments into concrete
policy action aimed at enhancing the resilience of the financial system; and

third, appropriate governance structures, including mechanisms for ensuring an
effective interplay between, and coordination of, macro and micro-prudential
responsibilities.
As regards the first, one of the basic prerequisites for an effective macro-prudential function
is the availability of a comprehensive set of information on the financial system that can be
used for the detection and assessment of systemic risk. This implies the attribution of specific
tasks to the macro-prudential authority with respect to accessing and collecting such
information, which may include macro-economic and macro-financial data and indicators, as
well as market intelligence.
In this regard, the European Supervisory Authorities (ESAs), the European System of Central
Banks, the Commission, the national supervisors and the national statistical authorities have
the obligation to cooperate closely with the ESRB and to provide all the information
necessary for the fulfilment of its tasks. In addition, the ESRB may request the ESAs to
supply information also on individual institutions on the basis of a reasoned request.
The ESRB will therefore have access to ample sources of information on risks. The
development of the appropriate infrastructure for pooling such information on an EU-wide
basis will be a major step forward in the assessment of financial stability in the single market,
but this will require substantial analytical and data-related expertise, as well as market
knowledge. Work is already under way to set up efficient procedures for regular
informationsharing between the ESRB and the ESAs.
The second component relates to the instruments available to the ESRB, which should be
geared to mitigating systemic risk on the basis of the outcome of the monitoring of the
financial system. As mentioned earlier, they include the issuance of risk warnings and policy
recommendations, as well as the monitoring of the follow-up by the respective addressees
on the basis of an "act or explain" mechanism.
One of the challenges in this respect is ensuring the effectiveness of the ESRB's
instruments. From the very outset, this will require the development of analytical tools and
models that underpin the macro-prudential policy process, including reliable systemic risk
indicators that support the issuance of warnings or recommendations on the calibration of
prudential measures. Such measures may include specific capital and liquidity requirements
to take account of financial cycles, or of the systemic relevance of financial institutions.
Furthermore, the effectiveness will also depend on close cooperation between the members
the ESRB and, in particular, the ESAs, which are expected to play an important role in the
implementation of the ESRB's recommendations.
Macro-prudential governance, as a third component, is decisive for the functioning of the
overall financial stability architecture. Central banks should play a major role, given their
interest in, and responsibility for, the stability of the financial system, as well as their
analytical expertise and the information they have on the real economy, financial markets
and market infrastructures.
The participation of the governors of all EU central banks in the General Board of the ESRB,
as well as the attribution of the Chair to the ECB's President, shows that the importance of
this role has been recognised. The ECB has also been requested to provide the Secretariat
and the necessary analytical, statistical, logistical and administrative support. For this
purpose, the ECB will optimise its existing capabilities and infrastructure in the areas of
financial stability monitoring, macro-economic analysis and the collection of statistical
information, to the benefit of the ESRB.
Supervisory authorities should be involved in, and contribute to, the macro-prudential
function with information, analysis and regulatory advice. The conduct of macro-prudential
policies will to a large extent also depend on supervisory measures. Accordingly, the
macroprudential framework should provide for coordination mechanisms between macro and
micro-prudential responsibilities, which should also avoid any potential overlaps or conflicts
of interest.
The legislation contains a number of provisions that provide the basis for a close institutional
collaboration between the ESRB and the ESAs. The provisions range from the mutual
participation in the boards of the ESRB and the ESAs - including the chair of the Joint
Committee of the ESAs as second Vice-Chair of the ESRB - to cooperative duties in the
monitoring and assessment of systemic risk, the conduct of stress-tests and the sharing of
information, as mentioned earlier. National supervisors will also participate in the ESRB's
General Board and will, as is important, be members of the Advisory Technical Committee.
This committee will be one of the main support structures of the ESRB, together with the
Advisory Scientific Committee of independent experts.
In conclusion, the establishment of the ESRB will introduce a new policy function at the EU
level, which has a great potential for enhancing the ability of European and national
authorities to safeguard the stability of the EU's financial system as a whole. The challenges
of designing and implementing this new EU-wide macro-prudential policy function are
considerable. However, with appropriate preparations, which are already ongoing in close
cooperation with all the parties involved, a smooth start of the ESRB may be envisaged in
2011.