Annual report 2016.
Date: 2017-08-30
Institutions: European Systemic Risk Board
Subjects: EU office or agency, European Union, activity report, financial control

Annual Report 

2016 

 
 
 
 
Contents 

Foreword 

Executive summary 

Section 1 – Systemic risks in the financial system of the European Union 

1 

2 

3 

4 

Repricing of risk premia in global financial markets 

Weaknesses in the balance sheets of banks, insurers and pension funds 

Debt sustainability challenges in sovereign, corporate and household sectors 

Shocks and contagion from the shadow banking system 

Section 2 – Policies addressing systemic risk 

1 

2 

3 

ESRB warnings and recommendations 

ESRB contributions to the EU macroprudential policy framework 

Review of national measures 

Section 3 – Ensuring implementation and accountability 

1 

2 

3 

Assessment of compliance with ESRB recommendations 

Reporting to the European Parliament and other institutional aspects 

The institutional framework 

Annex – Publications on the ESRB’s website from 1 April 2016 to 31 March 
2017 

Imprint 

ESRB Annual Report 2016 
Contents 

2 

3 

5 

8 

13 

19 

25 

29 

29 

31 

41 

50 

50 

55 

58 

59 

65 

1 

 
 
Foreword 

Mario Draghi, 
Chair of the  
European Systemic Risk Board 

This is the sixth Annual Report of the European Systemic Risk 
Board (ESRB), which covers the period between 1 April 2016 and 
31 March 2017. In the review period, the ESRB continued its close 
monitoring of vulnerabilities in the European Union (EU) financial 
system and contributed to the related policy debate. The ESRB paid 
particular attention to two overriding areas of risk. The first relates to 
the risks entailed by the continued low interest rate environment. 
The analysis of these risks jointly undertaken by the ESRB and the 
ECB was published in a report on macroprudential policy issues 
arising from low interest rates. This analysis also led the ESRB to 
consider the identified risk of weaknesses in the balance sheets of 
banks, insurers and pension funds as one of the two most 
prominent risks to financial stability in the EU, putting it at par with 
the risk of repricing of risk premia in global financial markets. 

The second area of risk concerns vulnerabilities related to residential real estate. Based on a 
forward-looking EU-wide assessment, the ESRB concluded that medium-term vulnerabilities prevail 
in eight Member States and issued public warnings to these Member States. The ESRB also issued 
a recommendation on closing data gaps to establish a more harmonised framework for monitoring 
developments in residential and commercial real estate markets in the EU. 

In the review period, the ESRB also expanded its capacity to monitor the non-banking sector. In 
particular, the ESRB published the first edition of an annual EU Shadow Banking Monitor, which 
identified sources and amplifying mechanisms of systemic risks. In connection with this, the ESRB 
contributed to shaping the debate on macroprudential policy beyond the banking sector. For 
instance, it set out both short-term policy options and a long-term agenda in this area. 

Furthermore, the ESRB was closely involved in fostering the discussion on macroprudential policy 
by hosting a number of conferences and workshops. Most notably, it held its first Annual 
Conference in September, which focused on the macroprudential policy stance and some of the 
most prominent topics on the agenda of macroprudential policymakers, such as the low interest 
rate environment, the implications of the central clearing obligation to make trading on standardised 
OTC derivatives safer, and the apparent scarcity of safe assets in the markets. 

Finally, I would like to warmly thank Stefan Ingves, Governor of Sveriges Riksbank, for his support 
to the ESRB over the last six years in his capacity as Chair of the ESRB’s Advisory Technical 
Committee (ATC). The new ATC Chair, Philip R. Lane, Governor of the Central Bank of Ireland, will 
take over the role from August 2017. 

Frankfurt am Main, July 2017 

Mario Draghi 
ESRB Chair 

ESRB Annual Report 2016 
Foreword 

2 

 
 
Executive summary 

The period under review was characterised by an environment of low economic growth and low 
interest rates, although the European and global economic outlook improved towards the end of the 
review period. The ESRB (jointly with the ECB) devoted significant resources to analysing the effect of 
this environment on the financial stability of the EU and published a report on the macroprudential 
policy issues arising from low interest rates. Moreover, the growing EU shadow banking system led 
the ESRB to step up its monitoring efforts and publish its first annual EU Shadow Banking Monitor, 
which identified sources and amplifying mechanisms of systemic risks. 

The ESRB continued to identify four main risks to financial stability in the EU, namely 1) a re-pricing of 
risk premia in global financial markets; 2) weaknesses in balance sheets of banks, insurers and 
pension funds; 3) debt sustainability challenges in sovereign, corporate and household sectors; and 4) 
shocks and contagion from the non-bank financial sectors to the wider financial system. As in the 
previous ESRB Annual Report, an abrupt reversal of global risk premia continued to be considered as 
a particularly prominent risk to financial stability. The low growth and low interest rate environment led 
the ESRB to deem weaknesses in the balance sheets of banks, insurers and pension funds to be of 
similar importance. 

In addition to its mandate to conduct macroprudential oversight of the financial system of the EU, the 
ESRB has a mandate to issue warnings when significant systemic risks are identified and it proves 
necessary to flag such risks. In view of this, the ESRB analysed the medium-term vulnerabilities in the 
EU Member States relating to the residential real estate sector. Based on its assessment, the ESRB 
issued public warnings to eight countries (Austria, Belgium, Denmark, Finland, Luxembourg, the 
Netherlands, Sweden and the United Kingdom). These were the first public warnings issued by the 
ESRB since its establishment. The ESRB also found significant gaps in the data available to analyse 
the real estate sector. It therefore adopted a Recommendation on closing real estate data gaps to 
establish a more harmonised framework for monitoring developments in residential and commercial 
real estate markets in the EU. 

The main financial stability risks that were identified by the ESRB formed the basis for the design of 
adverse scenarios for the EU-wide stress tests of the European Supervisory Authorities (ESAs). Over 
the review period, the ESRB provided adverse scenarios for the stress test of central counterparties 
(CCPs) by the European Securities and Markets Authority (ESMA) and the stress test of occupational 
pension funds by the European Insurance and Occupational Pensions Authority (EIOPA). Details of 
these scenarios are provided in this Annual Report. The scenarios the ESRB provided in early 2016 to 
the banking sector stress test by the European Banking Authority (EBA) and the insurance sector 
stress test by EIOPA were described in the ESRB’s 2015 Annual Report. 

The review period also marked the first year of operation of the voluntary reciprocity framework 
introduced by the ESRB in December 2015. In 2016, Belgium and Estonia were the first countries to 
request reciprocation of two of their measures under the new framework. The ESRB’s subsequent 
recommendation to all Member States that both measures be reciprocated eventually led to a 
significant increase in reciprocating actions across the EU. 

The ESRB also contributed to the European Commission’s consultation document on the Review of 
the EU Macro-prudential Policy Framework. The ESRB highlighted that it should continue to be 
independent, remaining nevertheless closely linked to the ECB. It proposed that the membership of 
the General Board remain broad and stressed that the macroprudential toolkit should be 
comprehensive and simple to use. In addition, it proposed some improvements in the design of 

ESRB Annual Report 2016 
Executive summary 

3 

specific tools targeting the structural and cyclical dimensions of systemic risk. Furthermore, the ESRB 
proposed that instruments addressing systemic risks originating mainly from residential real estate 
exposures be available to macroprudential policymakers in all EU Member States. Finally, the ESRB 
recognised the need to set up a legal framework for macroprudential policy beyond the banking 
sector. 

In addition, the ESRB contributed to the macroprudential framework for banking. First, it provided its 
views to the EBA on the introduction of the leverage ratio. Based on its preliminary analysis, the 
ESRB sees little evidence of the leverage ratio having a negative impact on market liquidity. Second, 
the ESRB contributed to the regular report coordinated by the EBA on the cyclicality of capital 
requirements. While acknowledging some analytical challenges, the report found weak evidence on 
the existence of procyclical effects arising from the Capital Requirements Regulation and Directive 
(CRR/CRD IV) package. It therefore proposed retaining the current risk-sensitive framework for bank 
regulatory capital. Third, the ESRB provided its views to the EBA on the definition of a net stable 
funding ratio (NSFR). The response identified the NSFR as the best available instrument to address 
structural issues related to liquidity and maturity transformation by banks. It noted that the ultimate 
goal of the European authorities should therefore be the implementation of a credible and sound 
NSFR requirement in the EU. 

Moreover, the ESRB contributed to the development of a macroprudential policy framework beyond 
the banking sector. The ESRB published a strategy paper in July 2016, presenting short-term policy 
options and a long-term policy agenda to mitigate financial stability risks linked to the non-banking 
sector. During the review period, the ESRB made progress on some of the key tasks set out in the 
strategy paper. First, the ESRB undertook steps towards creating innovative macroprudential 
instruments to address the procyclicality of initial margins and haircuts, especially in securities 
financing transactions and derivatives. Second, the ESRB provided a macroprudential perspective to 
the prudential supervision of CCPs and insurance companies, in particular providing input to ongoing 
legislative reviews. 

Compared with the previous year, 2016 saw a substantial increase in the number of measures 
covering macroprudential matters. It was the first year when all Member States set the countercyclical 
capital buffer on a quarterly basis and carried out the annual review of the designation and setting of 
buffer rates for other systemically important institutions. In the case of instruments that are not subject 
to periodic review, around half of the Member States took macroprudential policy actions, with a 
particular focus on instruments targeting risks related to residential real estate. 

During the period under review, the ESRB continued to evaluate the implementation of past ESRB 
recommendations. The assessment of compliance with the ESRB Recommendation on funding of 
credit institutions revealed a particularly high level of compliance by addressees. The assessment of 
compliance with the ESRB Recommendation on intermediate objectives and instruments of 
macroprudential policy showed that all Member States pursue the intermediate objectives 
recommended by the ESRB and link them to specific macroprudential instruments. The finalisation of 
the compliance assessment for the ESRB Recommendation on money market funds was postponed 
so as to take account of the finalisation of the EU Regulation on money market funds. 

Finally, the ESRB organised a number of conferences and workshops to foster discussion on 
macroprudential policy. In particular, the ESRB held its first annual conference, in which panellists 
debated the macroprudential policy stance and some of the most prominent topics on the agenda of 
macroprudential policymakers, such as the low interest rate environment, the implications of the 
central clearing obligation to make trading of standardised OTC derivatives safer, and the apparent 
scarcity of safe assets. 

ESRB Annual Report 2016 
Executive summary 

4 

Section 1 – Systemic risks in the financial system of the 
European Union 

During the review period the ESRB identified four main risks to financial stability in the 
European Union (EU). These risks are summarised in Table 1 and relate to 1) a repricing of risk 
premia in global financial markets; 2) weaknesses in the balance sheets of banks, insurers and 
pension funds; 3) debt sustainability challenges in sovereign, corporate and household sectors; and 
4) shocks and contagion from the non-bank financial sectors to the wider financial system. These 
four risks are interrelated and could reinforce each other if they materialised. A common factor that 
underlies these four risks is the environment of low economic growth and associated low interest 
rates, although the European and global economic outlook improved towards the end of the review 
period. These financial stability risks identified by the ESRB formed the basis for the design of 
adverse scenarios for various EU-wide stress tests (see subsection 2.4 in Section 2 for details). 

An abrupt and sharp repricing of risk premia in global financial markets was assessed as 
being the most severe risk to financial stability in the EU. As in the previous ESRB Annual 
Report, an abrupt reversal of global risk premia continued to be ranked as the most severe financial 
stability risk. This risk reflects excessive risk-taking amid historically low returns on savings and 
search for yield by financial investors, as well as increased geopolitical and economic policy 
uncertainties. A repricing of risk premia in global financial markets could have an adverse impact on 
the solvency position of EU banks and other financial institutions. 

Risks related to the weaknesses in the balance sheets of banks, insurers and pension funds 
were raised to the highest risk category. The main factor underlying this increase in the risk 
assessment was the continued low-yield environment and associated challenges to certain 
business models. Although market sentiment towards EU banks improved during autumn 2016, 
vulnerabilities related to low profitability, overcapacity and high stocks of non-performing assets in 
certain jurisdictions continued to pose challenges that need to be addressed. Moreover, the 
profitability and solvency of financial institutions that offer guaranteed returns (notably life insurers 
and pension funds) may come under pressure in an environment of low interest rates and returns 
over a prolonged period of time. 

Unresolved challenges to sovereign, corporate and household debt sustainability continued 
to pose risks to financial stability in the EU. High debt levels in certain EU Member States in a 
low nominal growth environment continued to represent a key vulnerability that could become a 
more pressing financial stability risk in the event of an increase in global risk premia or in risk-free 
interest rates. The ESRB is analysing whether the creation of sovereign bond-backed securities 
(SBSs) could play an important role in alleviating the sovereign-bank nexus if such risks were to 
materialise, without the mutualisation of sovereign debt across EU Member States. 

Potential shocks and contagion from the shadow banking system posed further challenges 
to financial stability. In 2016 the EU shadow banking system continued to grow. However, there 
was substantial heterogeneity in the size of the shadow banking system relative to the banking 
sector across EU Member States. If a stressed situation were to arise, the high degree of 
interconnectedness of the shadow banking system with other parts of the financial system could 
lead to spillovers and contagion. Although efforts to improve the monitoring of risks outside the 
banking system continued, the lack of harmonised, granular data constrained a comprehensive risk 
monitoring of the shadow banking system. 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

5 

The ESRB continued to develop the framework and tools for the identification of systemic 
risk, with a particular focus on residential real estate, low interest rates and the non-bank 
financial sector (see Box 1). Topics that received particular attention in 2016 were vulnerabilities 
in the EU residential real estate sector 1 (see subsection 1 below and subsection 1 in Section 2) and 
macroprudential policy issues that arise from low interest rates and structural changes in the EU 
financial system 2 (see Box 2). In addition, the ESRB also focused on analysing systemic risks 
originating in the shadow banking system 3 (see subsection 4 below) and macroprudential policy 
beyond the banking sector (see subsection 2.3 in Section 2). 

Table 1 
Overview of main risks to financial stability in the EU 

Repricing of risk premia in global financial markets 

1 

2 

3 

4 

Vulnerabilities: mispricing of risks and excessive risk-taking amid historically low cost of funding/low returns on savings and search for 
yield by financial investors 

Potential triggers: shocks to risk-free rates (such as monetary policy developments in main currency areas, inflation or fiscal shocks) or to 
risk premia (for example, as a result of geopolitical events or the materialisation of vulnerabilities in key emerging market economies) 

Weaknesses in the balance sheets of banks, insurers and pension funds  

Vulnerabilities (banks): challenges to sustainable sources of profit in the low interest rate environment, overcapacity and cost 
inefficiencies in some countries, slow progress in resolving high stocks of non-performing loans 

Vulnerabilities (life insurers and pension funds): low-yield environment increases life insurers’ and pension funds’ liabilities and creates 
challenges for long-term investments in high-quality assets  

Potential triggers: revaluation of liabilities at low interest rates (life insurers), weak returns on financial investments, losses on problem 
assets, significant prolonged profitability pressures (banks) 

Challenges to debt sustainability in sovereign, corporate and household sectors  

Vulnerabilities: high indebtedness in public and/or private sectors, weak nominal growth 

Potential triggers: repricing in financial markets, unsustainable fiscal spending, shocks to the outlook for growth 

Shocks and contagion from the shadow banking system 

Vulnerabilities: rapidly increasing size and complexity of the shadow banking sector, lack of data for comprehensive risk monitoring, 
strong direct and indirect linkages with bank/insurance and household/corporate sectors 

Potential triggers: repricing in financial markets with a potential for fire sales and liquidity squeezes 

Notes: Key financial stability risks identified for a time horizon of up to three years. Yellow denotes risk, orange denotes medium risk and red denotes 
high risk. The assessment of the severity of each risk reflects a combination of the likelihood of the risk and its potential impact. 

Box 1 
In the course of 2016 the ESRB continued to develop the framework and tools for 
identifying systemic risk with a particular focus on the non-bank financial sector 

The ESRB is responsible for the macroprudential oversight of the EU financial system and 
the prevention and mitigation of systemic risk. The ESRB therefore has a broad remit, covering 
banks, insurers, pension funds, asset managers, financial market infrastructures and other financial 
institutions and markets. To fulfil this remit, the ESRB needs to be able to monitor developments 
across both financial entities and financial activities. As financial sector growth has in recent years 

1   Report on Vulnerabilities in the EU residential real estate sector, ESRB, November 2016. 
2   Report on Macroprudential policy issues arising from low interest rates and structural changes in the EU financial 

system, ESRB, November 2016. 

3   See EU Shadow Banking Monitor, No 1, ESRB, July 2016, and Grillet-Aubert, L., Haquin, J.-B., Jackson, C., Killeen, N. 
and Weistroffer, C., “Assessing shadow banking – non-bank financial intermediation in Europe”, Occasional Paper Series, 
No 10, ESRB, July 2016. 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

6 

                                                           
occurred primarily outside the banking sector – a development that is expected to continue, 
supported by a move to a European capital markets union – the ESRB has focused on enhancing 
its ability to monitor risks beyond the banking sector. 

In July 2016 the ESRB published the first EU Shadow Banking Monitor along with its 
methodology for monitoring financial stability risks in the EU shadow banking system. The 
Monitor presents an annual overview of developments in the EU shadow banking system and 
focuses on assessing financial stability risks. 4 It was accompanied by a methodological background 
paper that provides further information on the data sources and risk indicators employed by the 
ESRB for identifying and monitoring risks and vulnerabilities within the EU shadow banking 
system. 5 The ESRB’s monitoring framework for the shadow banking system employs an entity-
based and activity-based mapping approach. While the entity-based approach uses aggregate 
balance sheet data, the activity-based monitoring approach employs higher frequency transaction-
based data to capture risks that are common to different types of financial entities. The ESRB also 
hosted the second ESRB shadow banking workshop, which focused on assessing the risks posed 
by shadow banking to financial stability and reflected on supervisory and other policy actions to 
address those risks. 6 The workshop discussions confirmed that a holistic approach is needed in 
order to fully map and assess the risks posed by shadow banking entities and activities. 

The ESRB continued to analyse the EU-wide dataset on derivatives transactions resulting 
from the European Market Infrastructure Regulation (EMIR) 7 with the aim of improving 
understanding of systemic risks in derivatives markets. 8 For example, an analysis of three of 
the largest derivatives markets by notional amounts (i.e. interest rate swaps, credit default swaps 
and foreign exchange forwards) showed a high degree of concentration of notional amounts within 
a small number of large intermediaries. In general, the EMIR dataset represents a key improvement 
in policymakers’ ability to monitor the potential risks that may arise in derivatives markets. The topic 
of derivatives and systemic risk was also discussed in detail at the first ESRB Annual Conference in 
September 2016. 9 

The ESRB also continued to monitor developments in real estate markets from a financial 
stability perspective and it enhanced its methodology for conducting country-level risk 
assessments. The monitoring of vulnerabilities in residential real estate markets led to eight 
country-specific warnings being issued and the publication of the ESRB report on Vulnerabilities in 
the EU residential real estate sector (see subsection 1 in Section 2). The methodology used in the 
process was continuously enhanced throughout the year, for example by improving the 
understanding of the interaction of risks and refining threshold values above which indicators signal 
vulnerabilities. The methodology was based on a three-stretch approach composed of the 
household stretch (or borrower stretch), the collateral stretch and the lender stretch, whereby risks 

4   See EU Shadow Banking Monitor, op. cit. 
5   See Grillet-Aubert, L., Haquin, J.-B., Jackson, C., Killeen, N. and Weistroffer, C., op. cit.  
6   For further information see the press release from 26 September 2016 regarding the second ESRB shadow banking 

workshop on the ESRB’s website. 

7   Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, 

central counterparties and trade repositories (OJ L 201, 27.7.2012, p. 1). 

8   See Abad, J., Aldasoro, I., Aymanns, C., D’Errico, M., Fache Rousová, L., Hoffmann, P., Langfield, S., Neychev, M., 

Roukny, T., “Shedding light on dark markets: First insights from the new EU-wide OTC derivatives dataset”, Occasional 
Paper Series, No 11, ESRB, September 2016. 

9   See the ESRB’s website for further information on the programme for its first Annual Conference.  

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

7 

                                                           
related to households’ indebtedness, the value of properties and the resilience of banks were 
identified. The interaction between these risks and the potential policies applied were subsequently 
taken into account. This enhanced method was aimed at obtaining a systematic and 
comprehensive overview of the vulnerabilities relating to residential real estate (see subsection 1 in 
Section 2). 10 

The ESRB also further strengthened its framework for monitoring developments in material 
third countries. In line with Article 138 of CRD IV 11, the ESRB may recommend setting a 
countercyclical capital buffer rate for exposures to third countries. For that purpose, the ESRB 
monitors the risks deriving from excessive credit growth in third countries identified as material for 
the EU banking system. 12 In order to do so, the ESRB extended its framework for monitoring 
cross-border credit exposures among Member States to also cover credit exposures between 
Member States and third countries. In addition, it developed a framework for monitoring 
developments in material third countries. 

As part of its annual review, the ESRB Risk Dashboard was developed further, with the 
changes implemented in the first issue of the Dashboard in 2017. The main proposed 
enhancements concerned the inclusion of new insurance sector indicators, based on Solvency II 
data. In addition, work was carried out on a set of experimental indicators describing risks of EU 
central counterparties (CCPs). Furthermore, work continued on an ESRB Heatmap (for internal 
use), with the aim of enhancing the framework for monitoring country-level risk. The ESRB 
Heatmap will be developed further and operationalised throughout 2017. 

The ESRB also completed a comprehensive analysis of macroprudential policy issues 
arising from low interest rates and structural changes in the EU financial system (see Box 2 
for further details). 13 

1 

Repricing of risk premia in global financial markets 

At the start of 2016 there was a partial repricing of risk premia in European and global 
financial markets, amid a subdued growth outlook (see Chart 1). During that period of turmoil, 
European and global financial markets recorded substantial declines, while the prices of 
commodities, energy companies, corporate bonds and high-yield securities dropped significantly. In 
addition, emerging markets experienced sizeable capital outflows. The increase in financial market 
volatility at the beginning of 2016 was underpinned by general uncertainty about the global 
economic recovery. In particular, the growth outlook for some EU Member States deteriorated 
further. 

10   Report on Vulnerabilities in the EU residential real estate sector, op. cit. 
11   Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of 
credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 
2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338). 

12  

In line with Decision ESRB/2015/3, the ESRB maintains a list of third countries that are material for the EU banking system. 
The list currently comprises the United States, Hong Kong, China, Turkey, Brazil and Russia. 

13   Report on Macroprudential policy issues arising from low interest rates and structural changes in the EU financial system, 

op. cit. 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

8 

 
                                                           
Chart 1 

European Commission’s GDP growth forecast 

(percentages) 

Spring 2016 Economic Forecast
Autumn 2016 Economic Forecast
Winter 2017 Economic Forecast

5

4

3

2

1

0

IT JP DK BE FR FI PT GR AT EA EE DE UK EU US NL LV CZ LT CY HU ES SI SE HR PL SK BG IE MT LU RO

Sources: European Commission’s Spring 2016, Autumn 2016 and Winter 2017 economic forecasts.  
Note: The average GDP growth forecast is calculated separately for 2016 and 2017 for each round of forecasts. 

Long-term nominal interest rates continued to be at historically low levels throughout 2016 
amid an environment of subdued nominal growth, despite sizeable yield increases since 
autumn 2016. While the EU economy had continued to recover over the past year, the actual real 
GDP growth rates and growth outlook remained subdued in most EU Member States. In line with 
this environment of subdued growth, short-term and long-term nominal interest rates remained at 
historically low levels, amid the accommodative monetary policy stance of major central banks (see 
Chart 2). Even though ten-year EU sovereign bond yields increased on average by around 50 basis 
points between September 2016 and March 2017, the yield level barely entered positive territory in 
those countries with the lowest financing costs. 

Chart 2 

Long-term nominal interest rates continued to be at historically low levels throughout 2016 

(ten-year government bond yields; percentages) 

euro area
Germany
United Kingdom
United States

6

5

4

3

2

1

0

-1

2008

Source: ECB. 

2009

2010

2011

2012

2013

2014

2015

2016

2017

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

9 

 
 
Despite bouts of market volatility, risk premia remained compressed across various asset 
classes during the period under review. In the context of the low-yield environment, the 
continued behaviour among investors in terms of searching for yield has led to increased exposure 
to credit and duration risk. At the same time, valuations in the EU corporate bond markets were at 
high levels, which reflected low risk-free rates (see Chart 2), but also low corporate bond spreads 
(see Chart 3). Moreover, standard metrics for stock market valuations, such as the price/earnings 
ratio, showed indications of stretched valuations (see Chart 4). 

Chart 3 

High-yield corporate bond spreads narrowed considerably during the course of 2016 

(spreads in basis points) 

AA-rated (left-hand scale)
BBB-rated (left-hand scale)
high yield (right-hand scale)

1000

800

600

400

200

0
2006

2500

2000

1500

1000

500

0

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Source: Bank of America Merrill Lynch. 
Notes: Spreads in basis points over German government bonds for both plain vanilla bonds and bonds with embedded options (for which the value of 
the option is stripped using proprietary models). The latest observation is for 14 March 2017. 

Chart 4 

Equity price/earnings ratios for EU non-financial corporations increased further during 2016 

(percentages) 

EU banking sector
EU insurance sector
EU non-financial corporations
EU Market Index

35

30

25

20

15

10

5

0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Sources: Thomson Reuters and Datastream. 
Note: The latest observation is for 9 March 2017. 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

10 

 
 
Political events, such as the UK referendum and the US election, were triggers for 
substantial market movements, although these did not lead to market stress. Following the 
outcome of the UK referendum on withdrawal from the EU on 23 June 2016, EU financial markets 
experienced sharp declines (see Chart 5). Despite historically large moves in some market 
segments, market infrastructures remained resilient. During this period, particularly large declines 
were observed in asset prices in the EU banking sector. Moreover, the outcome of the US 
presidential election in November 2016 led to a significant reaction in the bond markets, with US 
government bond yields increasing rapidly owing to an upward shift in inflation and growth 
expectations in the United States. This increased US and global yields, leading to steeper yield 
curves, and portfolio shifts from bonds into equities for example. 

Chart 5 

Stock markets dropped significantly following the results of the UK referendum 

(percentages; monthly data)  

median
June 2016
November 2016
March 2017

50

40

30

20

10

0

-10

-20

-30

-40

-50

FI

S&P
500
banks

SE

DK

AT

UK

Nikkei
500
banks

BE

NL

ES

FR

DE

PT

IT

IE

GR

Eurostoxx
600
banks

Sources: Bloomberg and ECB. 
Note: The latest observation is for 31 March 2017. 

Elevated uncertainty concerning political and economic policy remained prevalent towards 
the end of the review period, with the potential to trigger large market movements in the 
event of unexpected outcomes. The index of economic policy uncertainty for the EU increased 
significantly in the second half of 2016, amid the UK referendum and the US presidential election 
results. However, unlike during previous similar episodes of elevated economic policy uncertainty, 
volatility in financial markets did not increase together with the uncertainty index (see Chart 6). One 
concern towards the end of the review period was that the divergence in policy uncertainty and 
market volatility posed a risk for potential abrupt market movements going forward. 

An area of concern towards the end of the review period was that large abrupt increases in 
risk premia could lead to substantial losses for unhedged investors. EU non-money market 
investment funds, monetary financial institutions and insurance corporations each held around €3.5 
trillion to €4.5 trillion in debt securities at the end of the third quarter of 2016 (see Chart 7). 
Unexpected increases in credit risk, liquidity risk and term premia were considered to be potential 
triggers for an abrupt downward repricing of these debt securities. If such a repricing occurred, it 
could have potential negative consequences for the solvency position of unhedged holders of debt 
securities and thus an impact on financial stability in the EU. 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

11 

 
Chart 6 

Economic policy uncertainty in the EU was at an all-time high, while volatility remained low 

(left-hand scale: volatility index; right-hand scale: economic policy uncertainty) 

euro stoxx volatility index (right-hand scale)
FTSE volatility index (right-hand scale)
EU news-based Economic Policy Uncertainty Index (left-hand scale)

60

50

40

30

20

10

0

450

300

150

0

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Sources: Federal Reserve Bank of St. Louis and Datastream. 
Note: The latest observation is for 2 February 2017. 

Chart 7 
Holdings of debt securities are large for non-money market investment funds, monetary 
financial institutions and insurers 

(EUR trillions; third quarter of 2016) 

households and non-profit institutions serving households

non-financial corporations

general government

other financial institutions

pension funds

insurance corporations

monetary financial institutions

non-money market investment funds

Sources: Balance Sheet Items (BSI), ECB, Eurostat and ESRB calculations. 
Notes: The data refers to all debt securities owned by the national institutional sector (thereby excluding the rest of the world) as of the third quarter of 
2016 and includes all EU Member States. The data for monetary financial institutions excludes the Eurosystem (source: BSI). 

0

1

2

3

4

5

Vulnerabilities in residential real estate markets were identified in certain EU Member States, 
partly related to valuations or price dynamics. Following a forward-looking, EU-wide 
assessment of vulnerabilities relating to residential real estate (RRE), the ESRB found that 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

12 

 
 
vulnerabilities that could be sources of systemic risk in the medium term prevailed in a number of 
EU Member States (see also Box 1 and Section 2). 14 The key vulnerabilities highlighted by the 
ESRB assessment related to the indebtedness and ability of households to repay their mortgage 
debt (see also subsection 3 below), or to the valuation or price dynamics of RRE (see Chart 8). 
One concern was that a sharp increase in risk premia could cause price reversals in these RRE 
markets. The ESRB also performed an analysis of risks to the banking system from RRE. At that 
time no direct near-term risks arising from RRE exposures in the banking systems were identified, 
although second-round effects could not be excluded in the medium term. 

Chart 8 
RRE prices continued to grow at a robust rate in many EU Member States 

(x-axis: three-year annualised change; y-axis: one-year change) 

15%

10%

5%

0%

-5%

-5%

LV

RO

BG

LU

DE

AT

DK

SI

PL

PT

NL

ES

EU

SK

EA

BE

FR

HR

FI

IT

GR

CY

CZ

NO

MT

EE

UK

LT

HU

IE

SE

0%

5%

10%

15%

Sources: BSI, ECB, national sources and ECB calculations. 
Note: The latest observation is for the fourth quarter of 2016 (third quarter of 2016 for CY, LT and EU average). 

2 

Weaknesses in the balance sheets of banks, insurers and pension funds 

Financial stability risks related to weaknesses in the balance sheets of banks, insurers and 
pension funds increased during 2016. This increase arose primarily as a result of the continued 
low interest rate environment and related challenges to certain business models. At the beginning 
of 2016 volatility in European and global financial markets was elevated, partly driven by 
uncertainty over the global economic recovery. During this period model-based estimates of the 
probability that two or more large and complex banking groups would default increased from 
around 2% to 5% (see Chart 9). In addition, the prices of subordinated debt and equity instruments 
issued by EU banks dropped substantially and by more than those issued by other financial 
institutions. These price declines reflected concerns over both asset quality and challenges to the 
sustainable medium-term profitability of EU banks. 

14   Report on Vulnerabilities in the EU residential real estate sector, op. cit. 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

13 

 
                                                           
Chart 9 

Concerns about the EU banking sector increased at the beginning and middle of 2016 

(percentages) 

probability of a simultaneous default of two or more large banks
probability of a simultaneous default of two or more EU sovereigns

6

5

4

3

2

1

0
2014

2015

2016

2017

Sources: Bloomberg, Thomson Reuters and ECB calculations. 
Notes: See Annex 1 of the ESRB’s Risk Dashboard for further details on the methodology used to estimate these default probabilities. One caveat of 
the methodology is that it is based on market prices, which can at times be distorted. The latest observation is for 7 March 2017. 

European banks continued to be challenged by (i) low profitability in an environment of low 
nominal growth and interest rates, (ii) structural issues and (iii) high stocks of 
non-performing assets in certain jurisdictions. First, the persistence of low profitability levels of 
EU banks (see Chart 11) put into question the viability of institutions with business models that 
might not be able to adapt to the new operating environment characterised by low interest rates, 
increased competition and the arrival of fintechs. Second, low profitability levels were also driven to 
some extent by more structural factors, such as signs of excess capacity in certain EU banking 
systems, or high cost/income ratios which can be partly caused by strong competition (see 
Chart 12). 15 Finally, the need for some EU banking systems to address the legacy of non-
performing loans (NPLs) from the crisis remained a pressing issue (see Chart 10) in order to 
strengthen banks’ balance sheets and the banking sector’s resilience to adverse shocks. 

With regard to asset quality, the overall stock of non-performing loans remained elevated in 
several EU Member States. The NPL ratio was highly dispersed across EU Member States, 
ranging from 1% to almost 50%, and exceeding 10% for more than one-third of the EU Member 
States (see Chart 10). NPLs for exposures to small and medium-sized enterprises remained 
particularly high, and significantly higher than to large corporates and households. 

15   See, for example, the Advisory Scientific Committee (ASC) Report, Is Europe overbanked?, No 4, ESRB, June 2014. 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

14 

 
                                                           
Chart 10 

Ten EU Member States have aggregate NPL ratios of more than 10 percentage points 

(non-performing loans (NPLs) as a share of total loans) 

small and medium-sized enterprises
large corporates
households
NPL ratio

70%

60%

50%

40%

30%

20%

10%

0%

CY GR PT SI

IT IE HU BG RO HR PL AT ES MT EU SK LT FR BE LV DK NL CZ DE UK NO FI EE LU SE

Source: European Banking Authority (EBA). 
Notes: The country aggregates are based on the EBA bank sample. The observations refer to June 2016. 

As a result of these risks, market valuations of European banks dropped to historical lows 
(see Chart 11). For many banks, this trend continued after publication of the European Banking 
Authority’s stress test results at the end of July 2016. Overall, several factors had an impact on 
investors’ trust in banks, for example low profitability and concerns about asset quality, the impact 
of forthcoming pieces of regulation, structural changes and repeatedly observed misconduct cases. 
The lack of investor confidence was not only visible in market pricing, but also in unusually low 
demand for bank equity and debt instruments such as contingent convertibles (CoCos). 

Chart 11 
Valuations of EU banks remain low, amid low return on equity (RoE) 

(ratios (left panel); percentages (right panel))  

latest valuation
three-year average

Price-to-book ratios (P/B)

Return on equity (RoE)

1.5

1

0.5

0

15

12

9

6

3

0

EU

US

JP

EM

EU

US

JP

EM

Sources: Bloomberg and ESRB calculations. 
Note: The chart shows price-to-book ratios (P/B) for the following bank indices: EURO STOXX Banks, S&P 500 Banks Index, TOPIX Banks Index 
and MSCI Emerging Markets Banks. International comparisons of price-to-book ratios must take into account the different accounting standards in 
place in each jurisdiction and how they can affect the denominator of the ratio. The latest observation is for 13 March 2017.  

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

15 

 
 
Chart 12 

High correlation between cost/income ratios and market concentration in EU Member States 

(x-axis: share of the five largest credit institutions per country in total assets; y-axis: percentages, cost/income ratio) 

75

70

65

60

55

50

45

40

35

30

DE

AT

IT

FR

UK

HU

PT

BE

LU

IE

PL

SE

DK

CY

HR

FI

SK

SI

ES

CZ

LV

RO

BG

MT

NL

GR

R² = 0.36

LT

EE

20

30

40

50

60

70

80

90

100

Sources: Banking structural statistical indicators (ECB) and Consolidated Banking Data (ECB). Data on cost/income ratios relate to the third quarter 
of 2016, except those for Croatia, which are from the fourth quarter of 2015. The shares of the five largest credit institutions per country in total assets 
(CR5) relate to 2015. 
Notes: Market concentration is based on unconsolidated data, whereas cost/income ratios are based on consolidated data that include foreign 
subsidiaries. Market concentration can differ if measured at the consolidated level (as in the case of cost/income ratios), which could therefore also 
affect the correlation shown in the chart above. In the case of France, its position on the chart would be different if both indicators were to be 
measured at the same level of consolidation: when using consolidated data, it can be observed that in relation to the share of the five biggest banks, 
the French banking system is fairly concentrated, as the market share of the top five banking groups is close to 80% instead of the less than 50% 
reported by the chart when using unconsolidated data. The cost/income ratio is defined as total operating expenses divided by total operating 
income. The underlying profitability data are not annualised. 

Although market views of EU banks improved towards the end of the review period, the EU 
banking sector continued to face cyclical and structural challenges. Market sentiment towards 
the majority of European banks improved in the last quarter of 2016 in line with a global recovery in 
the asset prices of financial institutions. The main reasons for this change in sentiment were 
improvements in the nominal growth outlook that led to a steepening of the yield curve and a better 
profitability outlook for banks. However, challenges for EU banks remained in the form of low 
profitability and weak asset quality as well as the structural challenges mentioned above. This was 
also reflected in the fact that market participants made a clearer distinction between banks with 
high NPLs and low profitability compared with banks with low NPLs and higher profitability (see 
Chart 13). While there were numerous factors underlying the persistently low bank profitability, the 
low interest rate environment was a common factor and was the focus of a comprehensive review 
by the ESRB (see Box 2). 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

16 

 
Chart 13 

The market increasingly differentiated between banks based on their profitability and asset 
quality 

(bank stock prices; January 2016 = 100) 

top 10 banks
worst 10 banks

140

120

100

80

60

40

20

0
01/16

02/16

03/16

04/16

05/16

06/16

07/16

08/16

09/16

10/16

11/16

12/16

01/17

Sources: SNL Financial and ESRB calculations. 
Notes: A sample of 33 banks was ranked according to their non-performing loan (NPL) ratio and return on equity (RoE) at the end of 2015. A score 
was calculated based on the joint position of each institution in an “NPL ranking” (higher ratio = lower score) and an “RoE ranking” (higher ratio = 
higher score). The “top 10 banks” are the ten banks with the highest scores, while the “worst 10 banks” are the ten banks with the lowest scores. The 
latest observation is for 6 January 2017. 

The profitability and solvency of guaranteed-return life insurers and defined-benefit pension 
funds may come under pressure in an environment of low interest rates over a prolonged 
period. 16 For defined-benefit pension schemes and life insurance companies, the duration of 
liabilities is often longer than the duration of assets. A scenario of prolonged low interest rates 
would make it difficult for these institutions to earn sufficiently high asset returns to meet 
guaranteed values for long-term liabilities. In the long run this could render traditional 
guaranteed-return business models unviable and cause solvency problems. The European 
Insurance and Occupational Pensions Authority (EIOPA) 2016 insurance stress test indeed 
identified some vulnerabilities in a low-for-long adverse scenario. In addition, the evidence in the 
ESRB report on macroprudential policy issues arising in the low interest rate environment showed 
that the insurance and pension sectors were already moving from guaranteed-return products to 
products without guarantees (unit-linked business models and defined-contribution pension 
schemes). While this might be desirable for these sectors, it also means that the financial sector is 
withdrawing from the provision of longer-term return guarantees, and that risks are allocated to the 
household sector. 

16   See Report on Macroprudential policy issues arising from low interest rates and structural changes in the EU financial 

system, op. cit. 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

17 

 
                                                           
Box 2 
Risks from low interest rates and structural changes in the financial system were a 
key topic analysed by the ESRB during the review period 

In November 2016 the ESRB published a comprehensive report on the macroprudential 
issues arising from low interest rates and ongoing structural changes in the financial 
system of the EU. 17 The report was jointly prepared by the ESRB’s Advisory Scientific Committee 
and Advisory Technical Committee, and the ECB’s Financial Stability Committee. It analysed 
potential macroprudential issues arising from both a prolonged period of low interest rates and 
structural changes in the financial system, and discussed what impact these may have on financial 
stability and the real economy in the long term. The report took a forward-looking and holistic 
approach by considering all major sectors in the financial system, cross-sectoral spillovers and 
contagion channels. 

The ESRB report identified three main developments that are driven by an environment of 
prolonged low interest rates and may pose challenges to financial stability. These 
developments are 1) challenges to the sustainability of certain business models, 2) broad-based 
risk-taking and 3) structural changes towards a more market-based financial system. The ESRB 
report concluded that these developments were interrelated and that their magnitude varied across 
financial sectors and EU Member States. Financial stability risks related to the sustainability of 
business models and broad-based risk-taking (see subsection 1 above) were already present to 
some extent and thus should be given priority in terms of policy response. Other risks, including 
those related to changes in the structure of the financial system, had more of an emerging or 
conjectural nature (see subsection 4 below). 

The report also found that the low interest rate environment was weakening the resilience of 
the EU banking sector. In the longer term low interest rates could have a negative impact on bank 
profitability by exercising downward pressure on net interest income, in addition to the dampening 
impact on bank profitability of low loan growth. Credit standards could be relaxed excessively by 
banks facing longer-term profitability pressures and growing competition from non-banking sectors, 
if they sought to increase profitability by engaging in riskier activities. This, combined with 
protracted low growth, may lead to a deterioration in asset quality, although this could be 
counteracted in part by the higher debt servicing capacity of borrowers due to low interest rates. 

The ESRB also identified a series of policy options to mitigate and prevent the emergence of 
the financial stability risks highlighted in the report. Examples of policy options included the 
monitoring of credit standards by macroprudential authorities, the review of the regulatory yield 
curve which insurers use to establish the present value of their future liabilities within the 
Solvency II framework, and the development and operationalisation of a recovery and resolution 
framework to deal with insurers that are at risk of failure or failing. The policy options in the report 
are not to be taken as ESRB recommendations within the meaning of the ESRB Regulation, but 
rather as a set of proposals for further consideration by the relevant stakeholders. Furthermore, the 
policy options should be considered from a holistic and system-wide perspective given 
interrelations between the risks and the need to mitigate regulatory arbitrage. 

17   Report on Macroprudential policy issues arising from low interest rates and structural changes in the EU financial system, 

op. cit. 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

18 

 
                                                           
3 

Debt sustainability challenges in sovereign, corporate and household 
sectors 

Debt sustainability challenges in sovereign, corporate and household sectors continued to 
pose potential risks to financial stability in some EU Member States. Apart from some 
short-lived bouts of volatility, sovereign bond markets were relatively calm during the period of 
review. This situation was reflected in the rather low levels of sovereign bond yields and spreads of 
most EU Member States, compared with those at the height of the sovereign debt crisis in 2012. 
However, persistently high debt levels, especially for some EU sovereigns, remained a key 
vulnerability during the period of review. High debt levels can pose financial stability risks as they 
reduce borrowers’ ability to handle economic and financial shocks. This risk was also reflected in 
rising levels of credit default swaps for several EU sovereigns. Overall, significant deleveraging in 
the aggregate economy has occurred in only a few EU Member States, given that the aggregate 
debt-to-GDP ratio in the third quarter of 2016 was very close to the three-year average in many EU 
Member States (see Chart 14). However, this aggregate picture masked heterogeneous 
developments across countries and sectors within a given country. Some deleveraging progress 
has indeed been made, for example in Ireland, Portugal and Spain (see Chart 14).  

Chart 14 

Aggregate debt-to-GDP ratios remained close to the three-year average in most EU Member 
States 

(percentages)  

non-financial corporations
households
general government
three-year average

500

400

300

200

100

0

CY LU IE PT GR NL BE UK IT ES FR DK SE FI AT MT HR DE SI HU BG SK PL LV EE CZ LT RO

Sources: ECB and European Commission.  
Notes: Debt-to-GDP ratios for non-financial corporations are based on consolidated debt figures. Data for consolidated non-financial corporation debt 
are not available for the United Kingdom. The non-financial corporation debt of Cyprus includes the debt of Special Purpose Entities (SPEs), which 
do not have a material economic presence in Cyprus. SPE debt amounts to 77.4% of GDP. The latest observation is for 30 September 2016. 

The weak macroeconomic environment and growth outlook was an important factor 
underlying remaining debt sustainability concerns in EU Member States. While the EU 
economic recovery continued during the period of review, realised and expected real GDP growth 
rates remained low in most countries. During most of 2016, the growth outlook for 2016 and 2017 
for the EU as a whole and some EU Member States even deteriorated slightly, particularly in 
countries where growth was already subdued (see Chart 1). As debt sustainability is closely linked 
to the expected future income path, the low growth environment continued to pose challenges to 
the timely reduction of the remaining debt overhang. Towards the end of 2016, realised and 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

19 

 
expected growth improved slightly, as reflected in upward revisions of growth estimates by the 
International Monetary Fund and the European Commission for 2016 and 2017 for several EU 
economies (see Chart 1). 

Primary budget surpluses and low interest rates eased sovereign debt sustainability 
concerns during the period under review, but risks still remained for the most vulnerable EU 
Member States. Expected nominal GDP growth rates, although low in general, were above 
long-term interest rates over the past year in most EU Member States (see Chart 15), which made 
debt sustainability concerns less acute. Moreover, government budget balances before interest 
expenses (primary balances) were projected to be positive for 2017 and 2018 in most EU Member 
States (see Chart 15), which further eased acute debt sustainability concerns. However, nominal 
interest rates were higher than projected GDP growth rates particularly for the most vulnerable EU 
Member States, where sovereign debt-to-GDP ratios were highest (see Chart 14). This highlighted 
potential vulnerabilities in the event that interest rates increase across the EU without a 
concomitant increase in productivity and GDP growth rates. 

Chart 15 
Favourable primary budget balances and interest-growth differentials in most EU Member 
States 

(percentages; x-axis: Δ growth – yields; y-axis: primary budget balances) 

3

2

1

0

-1

-2

-6

GR

PT

CY

IT

DE

IE

CZ
SI

LV

SK

MT

LU

SE

EE

HR

BG

LT

NL

HU

AT

DK

FI

BE

UK

ES

PL

FR

-5

-4

-3

-2

-1

0

1

2

RO

3

4

5

6

Sources: ECB and annual macroeconomic database of the European Commission. 
Notes: The x-axis describes the differences of nominal GDP growth (European Commission forecast for 2016-18) and the ten-year government bond 
yield (mid-February 2017). The y-axis shows the primary budget balances as a percentage of GDP (European Commission forecast for 2016-18). 
The latest observation for long-term yields is for 15 February 2017. 

Long-term interest rates increased and sovereign bond spreads widened again towards the 
end of the review period, partly as a result of political uncertainty (see Chart 16). In the 
course of autumn 2016 long-term government bond yields across EU Member States started to 
increase from low levels in parallel with yield increases in the United States (see subsection 1 
above). At the same time the above-mentioned political events and uncertainties led to increases in 
sovereign spreads in a number of EU Member States. Between September 2016 and March 2017, 
ten-year yields therefore increased by around 50 basis points on average across all EU Member 
States (see Chart 17). 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

20 

 
Chart 16 

Sovereign yields remained low across EU Member States during the review period 

(ten-year sovereign bond yields; percentages)  

ES
FR
IE

IT
PT
UK

16

14

12

10

8

6

4

2

0

-2

2009

2010

2011

2012

2013

2014

2015

2016

Sources: ECB and ESRB calculations. 
Note: The latest observation is for 30 March 2017. 

Chart 17 

But there have been large increases in yields since autumn 2016 

(changes in ten-year sovereign bond yields between 29 September 2016 and 6 March 2017; percentage points) 

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

RO IT

LT MT LV PL FR BE ES IE LU HU SK SE PT FI NL DE UK CZ AT SI DK CY BG HR GR

Sources: ECB and ESRB calculations. 

The level of household debt continued to be high in a number of EU Member States (see 
Chart 18). In more than a third of EU Member States, household debt in 2016 stood at more than 
100% of disposable income. High household debt can pose a risk to financial stability because it 
makes households less able to handle economic and financial shocks. 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

21 

 
 
High levels of household indebtedness were also identified as a key factor underlying 
existing vulnerabilities related to residential real estate in a number of EU Member States. 18 
In many of the countries that received ESRB warnings on medium-term vulnerabilities related to 
RRE (see Section 2), vulnerabilities were linked to the indebtedness and ability of households to 
repay their mortgage debt (see Chart 18) or to the valuation or price dynamics of RRE. RRE risks 
can be linked closely to households’ debt sustainability situation, as mortgages and RRE assets 
usually represent a major part of their balance sheets, and RRE assets constitute a major source of 
collateral for lenders. Hence, RRE vulnerabilities and household debt sustainability concerns can 
have severe implications for banks’ balance sheets and financial stability (see subsection 1 in 
Section 2). 

Chart 18 

High household debt levels were a key factor underlying RRE vulnerabilities in a few 
countries 

(household debt as a share of disposable income; percentages) 

households
three-year average

300

250

200

150

100

50

0

DK NL CY SE IE LU UK FI PT ES BE GR FR AT DE EE PL

IT CZ SK HR SI BG LV HU LT RO MT

Sources: ECB and European Commission.  
Notes: Data for BE and HR are based on the first quarter of 2016. Data for BG and EE are based on the annual European System of Accounts (ESA) 
2010 series for 2014. Data for CY, HU, LT, LV and SK are based on the annual ESA 2010 series for 2015. Data for LU are based on the annual 
ESA 95 series for 2012. Data for MT are not available. 

Political tail risks, a repricing of global risk premia or abrupt increases in global risk-free 
interest rates were considered relevant triggers to turn remaining debt sustainability 
concerns into more pressing financial stability risks once again. In particular, the 
materialisation of risk 1 (see Table 1 above) was assessed to have the potential to reignite debt 
sustainability concerns. In the event that these risks materialised, the continued large exposures of 
some EU banking systems to their domestic sovereign (see Chart 19) were considered to have the 
potential to reignite the sovereign-bank nexus. In addition, insurance companies and pension funds 
also have significant domestic bond exposures. The ESRB is analysing whether the creation of 
sovereign bond-backed securities (SBSs) to alleviate the sovereign-bank nexus without mutualising 
sovereign debt across the EU Member States could be a feasible option and beneficial from a 
financial stability perspective (see Box 3 for details). 

18   See Report on Vulnerabilities in the EU residential real estate sector, op. cit. 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

22 

 
                                                           
Chart 19 

Exposures of some EU banking systems to their domestic sovereign remain high 

(share of total assets; percentages) 

last observation is for 31 December 2016
three-year average
31 December 2015

25

20

15

10

5

0

RO HU HR PL

IT SI SK ES BG CZ PT BE DE AT LT GR FR MT NL CY FI

LV DK SE EE UK IE LU

Source: ECB. 
Notes: Credit extended by monetary financial institutions (excluding the European System of Central Banks) to domestic general government. Credit 
comprises granted loans and holdings of debt securities issued. Total assets exclude remaining assets. For some countries, such as Italy and 
France, government-owned agencies mandated to finance primarily public administrations are listed as monetary financial institutions. 

Box 3 
In the first year of the ESRB Working Paper Series, 33 papers were published on 
systemic risk and macroprudential policy that help to inform the policymaking 
activities of the ESRB 

The ESRB Working Paper Series was launched in 2016 as an outlet for the publication of 
high quality research related to systemic risk and macroprudential policy. 19 The series is run 
by the Advisory Scientific Committee. Its purpose is to collate high-quality research on systemic risk 
to inform the macroprudential policymaking activities of the ESRB. In the first year of the Series, the 
ESRB published 33 working papers. Although these papers do not necessarily represent the official 
views of the ESRB, they nevertheless inform policy by shedding light on various aspects of 
systemic risk, the calibration of existing macroprudential policy instruments and the development of 
new ones. For example, in the first Working Paper entitled “Macro-financial stability under EMU”, 
Philip R. Lane examined the cyclical behaviour of country-level macro-financial variables under 
Economic and Monetary Union and stated the policy reform agenda required to improve 
macro-financial stability. 

Many of the working papers were positioned at the cutting edge of policy deliberations. 
Working Paper No 21 on ESBies: Safety in the tranches examines a new financial instrument, 
namely European Safe Bonds (ESBies), which is designed to weaken the nexus between 
sovereign risk and bank risk through diversification and tranching. Subsequently, the ESRB has 
investigated the feasibility of such instruments in a high-level task force chaired by Philip R. Lane, 

19   Submissions to the Working Paper Series are welcome when at least one co-author is affiliated to the ESRB or an ESRB 

member institution, or when the paper has been presented at an ESRB event. To submit a paper for consideration, email a 
pdf file to wpseries@esrb.europa.eu 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

23 

 
                                                           
Governor of the Central Bank of Ireland. Sovereign risk and the nexus between sovereign risk and 
bank risk was also the topic of three other ESRB working papers. First, Working Paper No 9 on 
Regime-dependent sovereign risk-pricing during the euro crisis looks at how sovereign risk pricing 
is regime-dependent and subject to threshold effects. The authors conclude that domestic fiscal 
discipline and structural reforms are insufficient to reduce yields insofar as the bank-sovereign 
feedback loop remains unaddressed. Second, Working Paper No 11, entitled Bank exposures and 
sovereign stress transmission, investigates the causes and effects of banks’ sovereign exposures 
during and after the sovereign debt crisis. The authors find that the publicly owned, recently 
bailed-out and less strongly capitalised banks reacted to sovereign stress by increasing their 
domestic sovereign holdings more than other banks. Third, in Working Paper No 35 on Addressing 
the safety trilemma: a safe sovereign asset for the Eurozone, Ad van Riet assesses the merits of 
introducing a safe sovereign asset for the euro area. The author describes two options: a credible 
multipolar system of safe national sovereign assets and a common safe sovereign asset for the 
euro area, concluding that the latter would be a more effective solution. 

ESRB Working Papers have often been timely and topical, providing academic insight into 
ongoing policy work. In Working Paper No 27 on (Pro?)-cyclicality of collateral haircuts and 
systemic illiquidity, Florian Glaser and Sven Panz provide empirical evidence on the topic of 
procyclicality of collateral haircuts. Contrary to expectations, the authors do not find evidence in the 
data for haircuts increasing with growing systemic illiquidity, and these therefore do not seem to 
trigger liquidity spirals. This work also informed the ESRB’s ongoing policy work around 
procyclicality of margins and haircuts. 

New datasets relevant for the analysis of financial stability, which are available at the ESRB, 
were also explored in the working papers. Working Paper No 33, entitled How does risk flow in 
the credit default swap market?, investigates a global, transaction-level dataset on credit default 
swaps (CDSs). The authors use this dataset to analyse the CDS market as a network of risk 
transfers among counterparties. They find that the flow-of-risk originates from a large number of 
ultimate risk sellers (for example, hedge funds) and ends up in a few leading ultimate risk buyers, 
most of which are non-banks (in particular asset managers). The analysis of the CDS portfolio of 
the latter shows a high level of concentration, potentially hinting at systemic vulnerabilities. Working 
Paper No 15, entitled Credit default swap spreads and systemic financial risk, also uses CDS 
market data to derive insights about systemic vulnerabilities, in particular, the probability that many 
banks fail simultaneously. 

The working papers often included novel methodological approaches to tackling issues of 
financial stability and systemic risk. Working Paper No 32 on Financial contagion with spillover 
effects: a multiplex network approach uses a novel approach stemming from the growing literature 
on financial networks. In particular, the authors use multiplex networks, a special type of multilayer 
network in which nodes cannot be interconnected with other nodes in other layers. Owing to the 
cutting edge methodology, the authors construct a comprehensive model of financial contagion 
encompassing both direct and indirect transmission channels. The analysis is particularly relevant 
to systemic risk, as it shows how positively correlated multiplexity can severely undermine market 
resilience. In the same vein, Working Paper No 20 on Multiplex interbank networks and systemic 
importance – An application to European data uses data on exposures between large European 
banks broken down by both maturity and instrument type to characterise the main features of the 
multiplex structure of the network of large European banks. They show that the specific level of 
network aggregation matters in the determination of interconnectedness and thus in the 
policymaking process. 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

24 

In the first year of the Series, working papers included a wide range of novel, policy-relevant 
studies. Not only did they contribute to the overall understanding of the systemic vulnerabilities 
within the financial system, but they will also inform ongoing discussions about systemic risk. With 
the use of novel approaches and new supervisory datasets, the Working Paper Series has the 
potential to inspire numerous research projects on systemic risk going forward, both within the 
academic realm and in research conducted by public institutions. 

4 

Shocks and contagion from the shadow banking system 

Structural changes and a prolonged period of low interest rates could result in a shift to a 
more market-based financial system. 20 This would be a welcome development and in line with 
the initiative of the European Commission for a capital markets union. However, it may also lead to 
the emergence of new financial stability risks. For example, the development of bank-like activities 
by non-banks might lead to regulatory arbitrage and result in challenges in terms of monitoring and 
supervision from a macroprudential perspective, as different regulations apply to institutions 
engaged in similar activities. Indeed, the shadow banking system in the EU has grown in 
importance in recent years, and the ESRB is developing frameworks and tools to monitor potential 
associated systemic risks (see Box 1). 

The EU shadow banking system continued to grow in 2016 albeit at a markedly slower pace 
compared with previous years. A broad measure of the shadow banking system in the EU, 
comprising total assets of investment funds 21 and other financial institutions (OFIs), amounted to 
€40 trillion in the fourth quarter of 2016 (see Chart 20). This represented approximately 38% of the 
total assets of the EU financial sector in the fourth quarter of 2016. This broad measure of the 
shadow banking system grew by 30% over the period 2012-16. There was, however, substantial 
heterogeneity across EU Member States in the size of the shadow banking system, both in 
absolute terms and relative to the size of the national banking sector.  

Wholesale funding provided by entities engaged in shadow banking continued to decline in 
2016, although at a slower pace than in previous years. This measure of wholesale funding by 
shadow banking entities includes debt securities of monetary financial institutions (MFIs) held by 
investment funds and money market funds (MMFs) plus total assets of financial vehicle 
corporations (FVCs). 22 Funding provided by these types of entities fell by 0.6% in 2016, after the 
measure declined by an average annual growth rate of -4.1% over the period 2012-15. The overall 
contraction in this measure masks some heterogeneous developments in its sub-components. MFI 
debt securities held by MMFs expanded during 2016 by 5.6%, while MFI debt securities held by 
investment funds and total assets of FVCs continued to decline. 

20   Report on Macroprudential policy issues arising from low interest rates and structural changes in the EU financial system, 

op. cit. 

Investment funds include money market funds. 

21  
22   Available data allow this measure to only be estimated for entities domiciled in the euro area, rather than for the EU as a 

whole. 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

25 

 
                                                           
Chart 20 

Broad measure of EU and euro area shadow banking (investment funds and OFIs) 

(EUR trillions and annual growth rates) 

EU broad measure (right-hand scale)
euro area broad measure (right-hand scale)
EU growth rate (left-hand scale)
euro area growth rate (left-hand scale)

30%

20%

10%

0%

-10%

40

30

20

10

0

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Sources: ECB and ECB calculations. 
Notes: Annual growth rates based on changes in outstanding amounts are indicated by the continuous lines. Dotted lines indicate annual growth 
rates based on transactions – i.e. excluding the impact of revaluations, exchange rate variations and statistical reclassifications. The latest 
observation is for the fourth quarter of 2016. 

The ESRB expanded its capacity for monitoring risks in the shadow banking system, as 
systemic risk may emanate directly from this part of the non-bank financial sector. 23 To this 
end, the ESRB published the first edition of the EU Shadow Banking Monitor, while substantial 
work was undertaken to further develop the monitoring framework in preparation for the publication 
of the second edition. The first EU Shadow Banking Monitor identified a number of issues that can 
be a source of, and amplify, systemic risks. Risks that are associated with shadow banking 
activities and relevant from a systemic perspective include financial leverage, which is particularly 
present in hedge funds, but also in real estate funds. Maturity and liquidity transformation are 
relevant risks especially for some bond funds, while systemic interconnectedness can be 
pronounced between MMFs and the banking system. Furthermore, entities such as FVCs, 
securities and derivatives dealers, and hedge funds often engage in significant maturity and 
liquidity transformation and leverage. 

The ESRB continued to examine cross-sector and cross-border linkages, particularly the 
interconnectedness of the shadow banking system with other parts of the financial system. 
During the review period, the ESRB published the results of its analysis on mapping EU banks’ 
exposures to shadow banking entities, which was undertaken in cooperation with the European 
Banking Authority. 24 The analysis highlighted the global and cross-border nature of existing 
linkages, as approximately 60% of EU banks’ total exposures are towards non-EU domiciled 
shadow banking entities. The analysis also found that the exposures are concentrated by type of 
counterparty with approximately 65% of the exposures to securitisation entities, non-money market 

23   See EU Shadow Banking Monitor, op. cit.; and Grillet-Aubert, L., Haquin, J.-B., Jackson, C., Killeen, N. and Weistroffer, C., 

op. cit. 

24   See Abad, J., D’Errico, M., Killeen, N., Luz, V., Peltonen, T., Portes, R., and Urbano, T., “Mapping the interconnectedness 

between EU banks and shadow banking entities”, Working Paper Series, No 40, ESRB, March 2017. 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

26 

 
                                                           
investment funds, and finance companies. In general, work on interconnectedness is ongoing with 
several initiatives under way at ESRB level. 

The ESRB also contributed to the ongoing debate on market liquidity conditions by 
providing new empirical evidence on the supply of liquidity services by market-makers. 25 In 
its broadest sense, market liquidity refers to the ease with which securities can be bought or sold 
without having an undue impact on prices. Liquid markets help to facilitate the financing of 
investments in the real economy and should support economic growth. There has been widespread 
concern from market participants and a range of international bodies that a significant decline in 
market liquidity could result in some fixed-income markets becoming impaired, which could pose a 
threat to financial stability. 26 Moreover, there were concerns that a combination of diminished 
market liquidity and liquidity mismatch in investment funds might exacerbate both the scale and 
impact on market liquidity of fire sale-type behaviour by funds attempting to meet redemption 
requests in times of stress. 27 However, whether these concerns were unfounded or not remained 
unclear, mainly because of a lack of available data. Against this background, the ESRB collected 
data from the largest market-makers operating in Europe. 28 

The data collected by the ESRB showed mixed evidence of developments in market 
liquidity, with the results varying by asset market and the market liquidity indicator used. A 
decreasing trend in both gross and net inventories was observed in corporate bond markets – 
possibly indicating a reduced ability or willingness among market-makers to act as intermediaries in 
these markets (see Chart 21). However, trends in market-making inventories for other asset 
classes were more mixed, and trading volumes remained relatively constant across asset classes. 
Median trade sizes decreased across asset classes, indicating a potential reduction in liquidity and 
changes in market behaviour. 

The ESRB continued to analyse the EU-wide dataset on derivatives transactions resulting 
from EMIR with the aim of improving the understanding of systemic risks in derivatives 
markets. 29 The opacity of over-the-counter (OTC) derivatives markets was a key determinant of 
the 2007-08 financial crisis. EMIR enacted the commitment made by the G20 leaders in 2009 to 
enhance the transparency of OTC derivatives markets by requiring contracts to be reported to trade 
repositories and making the information available to authorities. The ESRB analysed in detail a 
snapshot as of 2 November 2015 of the three largest segments of the OTC derivatives market, 
namely interest rate, credit and foreign exchange derivatives. 

25   Report on Market liquidity and market-making, ESRB, October 2016. 
26   See, among others, Global Financial Stability Report, International Monetary Fund, October 2015; Fixed income market 

liquidity, Bank for International Settlements, January 2016; Joint Committee Report of the European Supervisory Authorities 
on Risks and Vulnerabilities in the EU Financial System, Spring 2016; and Global Financial Market Liquidity Study, 
PricewaterhouseCoopers, August 2015. 

27   See, among others, Financial Stability Review, European Central Bank, May 2016; Macroprudential policy issues arising 

from low interest rates and structural changes in the EU financial system, ESRB, November 2016; Policy 
Recommendations to Address Structural Vulnerabilities from Asset Management Activities, Financial Stability Board, 
January 2017.  

28   Market-making plays an important role in a market that is functioning correctly. A key element of market liquidity in bond 
markets, and in corporate bond markets in particular, is market-makers’ ability to absorb temporary order imbalances by 
warehousing risk for short periods of time. 

29   See Abad, J., Aldasoro, I., Aymanns, C., D’Errico, M., Fache Rousová, L., Hoffmann, P., Langfield, S., Neychev, M., 

Roukny, T., “Shedding light on dark markets: First insights from the new EU-wide OTC derivatives dataset”, Occasional 
Paper Series, No 11, ESRB, September 2016. 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

27 

                                                           
Chart 21 

Market-makers’ European corporate bond inventories 

(EUR billions)  

long
short
net

200

150

100

50

0

-50

-100

Q1
2008

Q3
2008

Q1
2009

Q3
2009

Q1
2010

Q3
2010

Q1
2011

Q3
2011

Q1
2012

Q3
2012

Q1
2013

Q3
2013

Q1
2014

Q3
2014

Q1
2015

Source: ESRB data collection. 
Note: The latest observation is for the second quarter of 2015. 

A series of common determinants emerged from the analysis of the three largest segments 
of the OTC derivatives market. First, these markets were sizeable in terms of outstanding 
notional amounts. Second, they all showed a high degree of concentration within a limited number 
of large intermediaries (and in a small number of reference entities for CDS markets). Third, these 
markets reflected key regulatory changes aimed at managing and limiting counterparty risk, such 
as the introduction of mandatory central clearing and portfolio compression. For example, the 
interest rate swap market was in the process of becoming in large part centrally cleared, as 
opposed to being a bilateral market. The detailed micro data also made it possible to see that 
banks’ positions in interest rate derivatives increase in value when interest rates rise, whereas 
insurers’ and pension funds’ positions decrease in value. This may indicate how banks use these 
derivatives for hedging purposes as they transform their short-term liabilities into long-term ones. 

The growing importance of the EU non-bank financial system was also reflected in various 
ESRB initiatives to develop the macroprudential policy framework beyond the banking 
sector. Further details regarding these various policy-related initiatives of the ESRB related to the 
non-bank financial system are provided in subsection 2.3 of Section 2. 

ESRB Annual Report 2016 
Section 1 – Systemic risks in the financial system of the European Union 

28 

 
Section 2 – Policies addressing systemic risk 

This section reviews the ESRB’s work in the area of macroprudential policy. Subsection 1 
below provides an overview of ESRB warnings and recommendations issued during 2016, while 
the ESRB’s contributions to the policy framework for banking and beyond the banking sector are 
discussed in subsection 2. Subsection 3 concludes with a general overview of the measures 
adopted in the course of 2016.  

1 

ESRB warnings and recommendations 

This subsection provides an overview of the warnings and recommendations issued by the 
ESRB in 2016. Subsection 1.1 below summarises the ESRB warnings and recommendations on 
real estate while subsection 1.2 discusses the applications of the reciprocity framework during the 
year. 

1.1 

Systemic risk originating from the real estate sector 

Assessing vulnerabilities within the EU financial system is a key task of the ESRB. The 
ESRB is mandated to conduct macroprudential oversight of the financial system of the European 
Union (EU) in order to contribute to the prevention or mitigation of systemic risks. 30 It also has a 
mandate to issue warnings, either on a confidential basis or publicly, when significant systemic 
risks are identified and it is necessary to flag such risks. With this aim, the ESRB analyses the 
vulnerabilities in the EU Member States relating to the residential real estate sector. Given the 
importance of this sector for financial and macroeconomic stability, analysing potential 
vulnerabilities in this area is a key responsibility of macroprudential authorities. In order to prevent 
the build-up of vulnerabilities, it is especially important to take a forward-looking approach in the 
analysis. 

Building on the three stretches model, the assessment of vulnerabilities has been 
comprehensive in its approach. Building on previous work by the ESRB, 31 vulnerabilities were 
identified and classified into three “stretches”: collateral, household and banking. Collateral stretch 
refers to the price levels and dynamics in residential real estate markets; household stretch covers 
the implications of household borrowers’ debt, in terms of their ability to repay their debt and other 
behaviour (in particular, consumption); and banking stretch applies to the potential impact of 
residential real estate developments on lenders. 

The analysis undertaken consisted of both horizontal and country-specific analysis. First, an 
indicator-based cross-country framework was applied to identify a set of focus countries for further 
analysis. This framework, developed jointly by the ESRB and the ECB, used a range of risk 
indicators to identify a group of 11 focus countries where vulnerabilities had risen to the extent that 

30   Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24 November 2010 on European 
Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board (OJ 
L 331, 15.12.2010, p.1). 

31   The previous work includes the Report on residential real estate and financial stability in the EU, December 2015, 

ESRB Recommendation 2013/1 on intermediate objectives and instruments of macro-prudential policy 
(ESRB/2013/1) and The ESRB Handbook on Operationalising Macro-prudential Policy in the Banking Sector (2014). 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

29 

                                                           
they required further analysis from a systemic perspective. Second, a country-specific analysis of 
the focus countries was carried out. This analysis took into account the structural and institutional 
features of the Member State, as well as any policy measures that were taken.  

Based on this assessment of medium-term vulnerabilities relating to the residential real 
estate sector, the ESRB decided to issue public country-specific warnings to eight 
countries. 32 These were the first public warnings to have been issued by the ESRB since its 
establishment. They were communicated to the relevant ministers of the following eight Member 
States: Austria, Belgium, Denmark, Finland, Luxembourg, the Netherlands, Sweden and the United 
Kingdom. A brief overview of the vulnerabilities identified is provided in Section 1; full details of the 
assessment and methodology used are included in the ESRB report 33 that was published together 
with the warnings on 28 November 2016. Going forward, the ESRB will continue to exercise its 
mandate of macroprudential oversight of the financial system in the EU, including identifying 
financial stability vulnerabilities related to the real estate sector in all Member States. 

Apart from vulnerabilities, the ESRB also found significant gaps in the data available for 
analysing the real estate sector. Earlier work by the ESRB on residential and commercial real 
estate and financial stability in the EU had found that considerable data gaps exist in this area. The 
above-mentioned work carried out in the context of the warnings led to a similar conclusion. Lack of 
adequate data may hamper financial stability monitoring and macroprudential policymaking and 
therefore needs to be addressed. 

Therefore, the ESRB also adopted a Recommendation on closing real estate data gaps. 34 
With this Recommendation, the ESRB aims to establish a more harmonised framework for 
monitoring developments in real estate markets in the EU. The Recommendation, which was 
adopted on 31 October 2016, provides a common set of indicators that national macroprudential 
authorities are recommended to monitor in assessing risks originating from the real estate sector 
along with working definitions of those indicators. The Recommendation covers both the residential 
and commercial real estate sectors. The ESRB will monitor compliance with the Recommendation 
by means of the “act or explain” procedure. The deadline for implementing the Recommendation is 
end-2020. As a follow-up to the Recommendation, the ESRB is of the view that regular data 
collection on these indicators should take place at EU level and that the ECB is well placed to play 
a leading role in this. 

1.2 

Applications of the reciprocity framework 

2016 saw the first year of operation of the voluntary reciprocity framework introduced by the 
ESRB in December 2015. 35 This framework foresees the reciprocation of exposure-based 
macroprudential measures taken by Member States. Following a request from the Member State 
that activates a macroprudential measure, the ESRB recommends to all other Member States to 
reciprocate the measure if deemed justified. Other Member States should reciprocate, ideally with 
the same instrument, within a set time period. Member States have the option to exempt individual 

32   See the warnings on medium-term vulnerabilities in the residential real estate sector. 
33   Vulnerabilities in the EU residential real estate sector, ESRB, November 2016. 
34   Recommendation ESRB/2016/14 on closing real estate data gaps.  
35   Recommendation ESRB/2015/2 on the assessment of cross-border effects of and voluntary reciprocity for 

macroprudential policy measures. 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

30 

                                                           
financial service providers that have non-material exposures (in accordance with the de minimis 
principle). 

Two measures were requested for reciprocation in 2016. The first request came from 
Belgium. The Belgian measure consists of a 5 percentage point risk weight add-on applied under 
Article 458(2)(d)(vi) of the Capital Requirements Regulation (CRR) to Belgian mortgage loan 
exposures of credit institutions using the internal ratings-based (IRB) approach for measuring credit 
risk. Although the market share of branches and direct cross-border lending in Belgium is currently 
small, it was nevertheless considered important that the Belgian measure apply to these exposures 
given the significant market share of subsidiaries. 

The second request for reciprocation came from Estonia. The Estonian authorities requested 
reciprocation of the 1% systemic risk buffer rate on domestic exposures of all credit institutions 
authorised in Estonia, in line with the national transposition of Article 133 of the Capital 
Requirements Directive (CRD IV). Estonia’s request for reciprocation was motivated by the 
significant share of branches of foreign banks in the domestic market. Informally, Estonia provided 
an institution-specific materiality threshold of €200 million to guide the application of the de minimis 
principle by reciprocating Member States. 

The ESRB recommended reciprocation in both cases, but faced issues specific to each 
instrument. 36 In the case of Belgium, Article 458(5) of the CRR foresees reciprocation by other 
Member States for branches only and not for direct cross-border exposures. Covering these direct 
cross-border exposures would require reciprocating with equivalent measures, which could take 
longer to implement. The ESRB took a pragmatic approach and recommended that where there are 
no IRB credit institutions with material exposure via their branches located in Belgium or via direct 
cross-border claims, Member States were given the option not to reciprocate. If there was no 
reciprocation, Member States were recommended to monitor the situation and reciprocate if 
exposures become material. As concerns Estonia, reciprocation would be possible under national 
law by transposing Article 134 of CRD IV, which allows for reciprocation of a systemic risk buffer. 
Some Member States do not have a procedure in place in their relevant legal framework similar to 
the one set out in Article 134 of CRD IV and/or cannot activate it at this point (Finland, Italy and the 
United Kingdom). In these cases, the ESRB recommended that Member States should reciprocate 
the Estonian measure with equivalent measures.  

2 

ESRB contributions to the EU macroprudential policy framework 

This subsection provides an overview of the ESRB’s contribution to the macroprudential 
policy framework in 2016. Subsection 2.1 below summarises the ESRB response to the 
European Commission’s consultation on the review of the EU macroprudential policy framework. 
Subsection 2.2 discusses ESRB input into various banking sector instruments while subsection 2.3 
discusses the input for non-banking sectors. Subsection 2.4 summarises the ESRB’s activities in 
the area of stress testing during the review period. 

36   To include the two measures in the list of measures to be reciprocated, the ESRB amended its Recommendation 

ESRB/2015/2 via Recommendation ESRB/2016/3 (adopted in March 2016) and Recommendation ESRB/2016/4 (adopted 
in June 2016). 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

31 

                                                           
2.1 

ESRB input to the Commission consultation on the review of the EU 
macroprudential policy framework 

In October 2016 the ESRB published its response to the European Commission’s 
Consultation Document entitled Review of the EU Macro-prudential Policy Framework. 37 The 
ESRB highlighted that it should continue to be independent, with a distinct organisational identity 
separate from the ECB. Nevertheless, the ESRB should also remain closely linked to the ECB by 
maintaining the present administrative and budgetary support provided by the ECB. The link with 
the ECB could be further enhanced by the de jure chairmanship of the ESRB by the President of 
the ECB. 38 

The ESRB proposed that the membership of the General Board should remain broad and 
that the new institutional macroprudential set-up should be adequately reflected in its 
composition. Public or central government authorities mandated to implement macroprudential 
policy at national level should therefore become members of the ESRB without voting rights. The 
ESRB is of the view that the extended composition of the General Board would enhance 
coordination among all relevant stakeholders and facilitate the identification and mitigation of risks 
across all EU jurisdictions and sectors of the financial system. 

The ESRB stressed that the macroprudential toolkit should be comprehensive and simple to 
use. This is essential for macroprudential authorities to be able to adequately and promptly 
respond to systemic risks. The transparency and effectiveness of macroprudential policy needs to 
be further improved by a clear delineation of mandates, powers and tools between micro- 
(competent) and macroprudential (designated) authorities. The ESRB also considered that the 
coordination between competent and designated authorities should be further improved. This is 
particularly the case when specific instruments are used on financial stability grounds, such as the 
macroprudential use of Pillar 2 and for the application of risk weights and loss given default floors 
under Articles 124 and 164 of the CRR. The ESRB further emphasised that flexibility in the 
activation and use of the available tools is needed. It therefore advocates that the current 
mandatory sequencing in the use of certain tools under Article 458 of the CRR should be 
streamlined. Finally, the ESRB stressed that the reciprocation (mutual recognition) of national 
exposure-based measures should generally become the rule. This would further enhance the 
effectiveness of and consistency in macroprudential policy and would avoid regulatory arbitrage by 
ensuring a level playing field within the EU. 

Some improvements in the design of specific tools targeting the structural dimension of 
systemic risk are warranted. The ESRB suggested that the existing cap of 2% on the buffer for 
other systemically important institutions be substantially increased. This should also be mirrored at 
subsidiary level when the EU parent institution is already subject to that buffer requirement on a 
consolidated basis. The ESRB is further of the view that the definition of the systemic risk buffer 
should be clarified and narrowed so that the buffer is not used to address risks pertaining to 
systemically important institutions. Moreover, national authorities should be able to impose more 
than one buffer rate if distinct structural risks were to be addressed within one jurisdiction; and 

37   The response to the consultation is available online here. 
38   While the ESRB remains autonomous and its distinguished organisational identity has been established, it has also 

strongly benefited from the visibility, independence and reputation of the ECB’s President; this would be strengthened by 
making the link between the ECB’s President and the ESRB’s Chair permanent.  

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

32 

                                                           
national authorities should also be able to apply the systemic risk buffer to sectoral exposures that 
are structurally relevant for the country in question. 

The ESRB considered that the macroprudential use of liquidity instruments could be a way 
forward to address the cyclical risks related to excessive maturity mismatch. In addition, the 
ESRB considered that a macroprudential leverage ratio would add another useful element to 
the toolkit. The liquidity instruments include the liquidity coverage ratio (LCR) and the net stable 
funding ratio (NSFR). In case a macroprudential dimension of these two instruments were to be 
incorporated into Union law, the possible features could be an additional time-varying liquidity 
buffer capturing cyclical risks that would apply over and above the static minimum prudential LCR 
or NSFR requirement. Moreover, an additional liquidity buffer could also be considered as a 
structural measure addressing, for example, similar liquidity risks resulting from specific funding 
sources or business models. In the same vein as the macroprudential liquidity buffers, the ESRB 
considered a macroprudential leverage ratio, targeting both the structural and cyclical aspects of 
systemic risk, as another useful element of the macroprudential toolkit that should be enshrined in 
Union law. 

The ESRB acknowledged that many Member States are using instruments under national 
law to address systemic risks originating mainly from residential real estate exposures. It 
recommended that these instruments should be available to macroprudential policymakers 
in all EU Member States. However, the ESRB is also of the view that such instruments – including 
decisions concerning their design, implementation and application – should be in the hands of 
national macroprudential authorities. Examples of borrower-based instruments that are not 
harmonised under Union law include caps on loan to value (LTV), loan to income (LTI) and debt 
service to income (DSTI). Further efforts are required to overcome the problems of existing data 
gaps (as discussed in subsection 1.1 above), the lack of coherent definitions, and other operational 
impediments affecting consistency and coordination in the application of these instruments in the 
EU. 

Finally, the ESRB recognised that there is a need to set up a legal framework for 
macroprudential policy beyond the banking sector. Such a framework is needed to address 
risks and vulnerabilities in the insurance and pension fund sector, the investment fund sector, 
central counterparties (CCPs) and financial markets. The present gap in the macroprudential policy 
toolkit to address risks outside the banking sector in the EU could hamper the effective prevention 
and mitigation of systemic risks originated or transmitted by a rapidly growing non-banking segment 
of the financial sector. The ESRB’s work in this area is discussed further in subsection 2.3 below. 

2.2 

ESRB contributions to the macroprudential framework for the banking 
sector 

a) Impact of the leverage ratio on market liquidity 

The ESRB provided the European Banking Authority (EBA) with its views on the 
introduction of the leverage ratio. The ESRB considers the leverage ratio to be a useful 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

33 

instrument as part of the overall regulatory toolkit. 39 The leverage ratio was initially proposed by the 
Basel Committee on Banking Supervision (BCBS) in December 2009 and is expected to be 
introduced as a Pillar 1 standard by 1 January 2018. 40 The EBA was mandated to submit a detailed 
report on the impact assessment and calibration of the leverage ratio under Article 511 of the CRR. 
The EBA published this report in August 2016. 41 The ESRB was not formally required by the CRR 
to give its opinion on or contribute to the EBA report. However it was considered that there are 
material reasons why the ESRB should convey some macroprudential messages to the EBA before 
leverage requirements are harmonised and introduced at EU level. In particular, the ESRB provided 
input to the EBA on the leverage ratio and the state of market liquidity. The EBA published this 
contribution in the final report, noting that the ESRB has access to data which is relevant to this 
assessment.  

The ESRB analysis 42 investigated the potential positive and negative effects of the leverage 
ratio requirement on market liquidity. Recent discussions on the introduction of a leverage ratio 
have focused on the topic of market liquidity. In particular, the leverage ratio has come under 
criticism by some industry participants and observers for having affected the supply of liquidity and 
intermediation services by broker-dealers in a significant way. Against this background, the focus of 
the ESRB’s work on potential effects of the leverage ratio requirement on market liquidity has been 
to (i) set out the conceptual channels by which the leverage ratio may affect banks and their role in 
facilitating liquid markets, and (ii) investigate whether there is any empirical evidence of an impact 
due to the anticipation of a leverage ratio requirement. 

The conceptual analysis suggests there may be some costs associated with the leverage 
ratio for broker-dealers, but that there are also expected to be benefits. There are channels by 
which the leverage ratio could reduce incentives to act as a market-maker or provide market 
financing. The ESRB identified two relevant activities that may be affected: (i) dealers providing 
inventory, particularly for low risk-weighted assets; and (ii) banks that finance leveraged 
intermediaries who take positions in markets, in what is known as “funding liquidity”. In this way, the 
leverage ratio could make some market liquidity-related activities less attractive for part of the 
banking sector and result in increased capital costs for firms with low average risk weights. Aside 
from any costs related to these potential adjustment actions, the leverage ratio can also be 
expected to support market liquidity, particularly during periods of stress. First, it ensures a 
minimum degree of resilience at all stages in the financial cycle, making banks better able to 
absorb shocks. Second, there may also be an impact through banks’ own funding costs. Better 
capitalised banks may be more able to absorb short-term stresses and maintain financial services. 

The empirical analysis suggests there is very little evidence of the leverage ratio negatively 
impacting market liquidity. An empirical method was used to investigate whether the leverage 
ratio requirement had any causal impact on banks’ market liquidity-related business after the date 

39  

In its Recommendation on intermediate objectives and instruments of macro-prudential policy (ESRB/2013/1), the ESRB 
identified the prevention of excessive credit growth and leverage as one intermediate objective of macroprudential policy 
and noted that a macroprudential leverage ratio instrument could contribute to achieving this intermediate objective.  

40   Strengthening the resilience of the banking sector, BCBS, December 2009. 
41   EBA report on the leverage ratio requirements under Article 511 of the CRR, EBA-Op-2016-13, EBA, August 2016. 
42  

It is important to remember that the potential for analysing this topic was limited for a few reasons: several factors may 
have been influencing the state of market liquidity in recent years and it is difficult to disentangle the effect of specific 
factors; the leverage ratio is still only an anticipated capital requirement for the majority of EU banks; and there is no agreed 
theoretical framework for market liquidity, market-making and regulation which can be used to model the impact of 
introducing a leverage ratio requirement. 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

34 

                                                           
of the initial BCBS announcement in 2009. The findings suggest that banks which needed to 
improve their leverage ratios to meet a 3% requirement or market expectation have been doing so 
in part by reducing their trading assets relative to the amount they would have held if not bound by 
the leverage ratio; however neither trading assets nor repos have significantly fallen as a share of 
these banks’ total assets since 2010. Arguably, a general deleveraging has been a desired effect of 
the leverage ratio for banking regulators, and it is positive for market liquidity considerations that 
trading and financing activities have not been reduced disproportionately as part of this process. 
Some further statistical analysis to investigate the relationship between dealers’ inventories and 
their leverage ratio position shows very little evidence of a significant relationship between the two 
since 2014. 

b) Cyclicality of capital requirements 

The ESRB contributed to the regular report coordinated by the EBA on the cyclicality of 
capital requirements. This report, which is required under Article 502 of the CRR, was 
coordinated by the EBA and benefited from contributions by the ECB and ESRB. The aim of the 
report was to clarify whether risk-sensitive bank capital requirements, as laid down in the CRR and 
CRD IV, create any unintended procyclical effects by reinforcing the endogenous relationships 
between the financial system and the real economy. 

While acknowledging some analytical challenges, the report found weak evidence on the 
existence of procyclical effects arising from the CRR/CRD IV package. The report 
recommended retaining the current risk-sensitive framework for bank regulatory capital. If 
procyclicality risks were to become more material, the EU financial regulatory framework has 
various tools at its disposal which could be used. These include the capital conservation buffer, the 
countercyclical capital buffer, the leverage ratio with a macroprudential component, risk weights for 
real estate exposures and other supervisory measures. For those purposes, the impact of the 
regulatory framework for EU banks on the economic cycle should be monitored regularly and the 
potential impact, effectiveness and efficiency of countercyclical instruments should be further 
analysed. 

c) Net stable funding ratio 

The ESRB provided its views to the EBA on the definition of an NSFR. 43 In accordance with 
Article 510 of the CRR, the EBA consulted the ESRB on the methodologies for determining the 
amount of stable funding available to, and requested by, institutions, as well as on appropriate 
uniform definitions for calculating such a net stable funding requirement. The ESRB response was 
later incorporated into the EBA response to the European Commission’s call for advice on the 
NSFR. 44 

The response identified the NSFR as the best available instrument to address structural 
issues related to liquidity and maturity transformation by banks. The ESRB has already 

43   See ESRB response to the consultation on the Net Stable Funding Ratio (NSFR) as mandated by Article 510 CRR. 
44   See EBA Report on Net Stable Funding Requirements under Article 510 of the CRR, EBA/Op/2015/22, EBA, 

December 2015. 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

35 

                                                           
published several documents discussing the possible macroprudential use of liquidity instruments 
and has identified the NSFR as one of the most promising of such tools. 45 

Members of the ESRB broadly agree that it would be possible to use the NSFR as a 
macroprudential instrument. This macroprudential use could have two aspects: (i) a time-varying 
requirement, potentially composed of a minimum requirement and the possibility to complement it 
with a macroprudential buffer, which could be released in times of stress; and (ii) a cross-sectional 
requirement, calibrated according to each institution’s contribution to systemic liquidity risk. 
Incorporating these two aspects into the NSFR would pose considerable challenges to 
macroprudential authorities as regards the calibration of the ratio. The ESRB therefore encouraged 
further work in this area, including analysis through the economic cycle and a quantitative analysis 
on the potential costs and benefits. 

The ESRB noted that the ultimate goal of the European authorities should be the 
implementation of a credible and sound NSFR requirement in the EU. To that end, the ESRB 
supported (i) the use of the same weights for both the required stable funding and the available 
stable funding, as agreed by the BCBS and (ii) the requirement for an NSFR on both a consolidated 
and solo basis (the latter subject to appropriate waivers or exemptions). The ESRB is also of the 
view that no preferential treatment for specific business models should be introduced in the NSFR 
unless it can be proved that such business models do not pose systemic liquidity risk. Furthermore, 
a majority of ESRB members considered that proportionality of the NSFR should be applied at the 
level of supervisory reporting and not on the methodology for the calculation of the NSFR. These 
members consider that liquidity and maturity mismatch, which the NSFR aims to address, are also 
of relevance to smaller institutions. 

2.3 

ESRB contributions to the macroprudential framework beyond the 
banking sector 

The ESRB set out both short-term policy options and a long-term agenda for 
macroprudential policy beyond the banking sector. Although the framework for monitoring risks 
outside the banking sector is taking shape (see Box 1 in Section 1), macroprudential policy beyond 
the banking sector remains in its formative stage. In particular, the policy strategy, regulatory data 
and instruments required to address risks beyond the banking sector are underdeveloped. In 
response, the ESRB published a strategy paper in July 2016 setting out steps designed to 
gradually fill this gap in financial stability policy. 46 The paper provides an overview of the legal and 
institutional framework governing macroprudential policies beyond the banking sector. It further 
presents short-term policy options and a long-term policy agenda to reflect new opportunities 
outside the banking sector and mitigate corresponding financial stability risks. 

Progress has been made on some of the key tasks set out in the strategy paper for the 
ESRB and its members. Short- to medium-term tasks set out in the paper include contributing to 
the development of new macroprudential instruments, such as instruments to address the 
procyclicality of initial margins and haircuts, especially in securities financing transactions (SFTs) 

45   See, among others, The ESRB Handbook on Operationalising Macro-prudential Policy in the Banking Sector or 
Clerc, L., Giovannini, A., Langfield, S., Peltonen, T., Portes, R. and Scheicher, M., “Indirect contagion: the policy 
problem”, Occasional Paper Series, No 9, January 2016. 

46   Macroprudential policy beyond banking: an ESRB strategy paper, ESRB, July 2016. 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

36 

                                                           
and derivatives. They also include contributing to the development of the wider financial stability 
toolkit (such as top-down stress tests for CCPs, insurers and pension funds) and recovery and 
resolution frameworks for CCPs and insurers. Providing ESRB input to ongoing legislative reviews 
so as to ensure the macroprudential perspective is included in relevant regulation in the EU is also 
one of the tasks identified in the strategy paper. The remainder of this subsection 2.3 describes 
how the ESRB has progressed on these tasks. 

a) Macroprudential use of margins and haircuts 

The ESRB has undertaken initial steps in exploring innovative macroprudential instruments 
that might be able to address procyclicality of initial margins and haircuts. The use of 
collateral is playing an increasingly important role in the financial system, with risk management 
practices in place that comprise margin and haircut requirements. These risk management 
practices may be able to amplify the inherent cyclicality in collateral requirements and exacerbate 
leverage cycles. Against this background, the ESRB published a comprehensive report that sets 
out how margins and haircuts could in principle be used as macroprudential tools. 47 Although they 
apply primarily to SFTs and derivatives, new macroprudential instruments could have the potential 
to mitigate systemic risk from excessive leverage and procyclicality in collateral requirements in 
non-centrally and centrally cleared transactions. The report also highlights the practical challenges 
in the implementation of such tools and proposes further work to help address these challenges. 
The report was informed by a conference the ESRB held in June 2016 with the aim of gathering the 
views of policymakers, representatives from academia and market participants from different 
jurisdictions on the use of margins and haircuts as potential new instruments, and what main 
benefits and challenges might be anticipated when applying them for macroprudential purposes. 48  

The ESRB assessed the role of SFTs in contributing to the build-up of excessive leverage 
and considered options to address these risks. The ESRB’s opinion 49 was designed to inform 
the work of the European Commission, which is mandated by Article 29(3) of the Securities 
Financing Transaction Regulation (SFTR) 50 to assess the progress in international efforts to 
mitigate the risks associated with SFTs. Based on the initial finding that the use of SFTs can give 
rise to the build-up of significant leverage in the financial system, the ESRB’s opinion supports the 
implementation of the Financial Stability Board’s framework for haircuts on non-centrally cleared 
SFTs 51 in the EU. However, it notes the current lack of a comprehensive framework to address the 
build-up of leverage at a systemic level. Therefore, the ESRB’s opinion highlights the need to 
develop a macroprudential approach towards the setting of margins and haircuts in order to limit 
the build-up of systemic risk in both centrally and non-centrally cleared SFTs. 

47   The macroprudential use of margins and haircuts, ESRB, February 2017. 
48   More information on the conference can be found here.  
49   ESRB opinion to ESMA on securities financing transactions and leverage under Article 29 of the SFTR, ESRB, 

October 2016. 

50   Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of 
securities financing transactions and of reuse and amending Regulation (EU) No 648/2012 (OJ L 337, 23.12.2015, 
p. 1).  

51   Transforming Shadow Banking into Resilient Market-based Finance, Financial Stability Board, November 2015. 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

37 

                                                           
b) Macroprudential perspective on the prudential supervision of CCPs 

In view of the key role that CCPs play in the post-crisis financial system, the ESRB has 
continued to provide a macroprudential perspective to the prudential supervision of CCPs. 
Following the commitments made by G20 leaders at the Pittsburgh Summit in 2009 to have 
standardised derivatives contracts centrally cleared, a corresponding EU regulatory framework – 
the European Market Infrastructure Regulation (EMIR) 52 – was enacted in 2012. The reforms have 
made the financial system safer, with increased transparency in previously opaque OTC derivatives 
markets and less counterparty credit risk. By making CCPs central hubs for systemic risk 
management, the reforms have placed considerable responsibility on CCPs, their regulators and 
supervisors whereby any disorderly failure of a CCP would pose a significant risk to financial 
stability. In view of this, the ESRB has continued to provide a macroprudential perspective to the 
prudential supervision of CCPs. 

The ESRB contributed to an assessment carried out by the European Commission by 
analysing the systemic risk implications of CCP interoperability arrangements. An 
interoperability arrangement is an arrangement between two or more CCPs that involves a 
cross-system execution of transactions between CCPs. Such arrangements may result in some 
benefits from a systemic risk perspective but can also provide a potential additional channel for 
contagion between CCPs if risks are not properly managed. The ESRB noted that those risks are 
addressed in the current regulatory framework in the EU but could be further enhanced by including 
more granular requirements in EMIR. 53 The report points out the need for further analysis on what 
impact potential OTC derivatives links between CCPs would have on systemic risk. 

In response to a consultation by the European Securities and Markets Authority (ESMA), the 
ESRB published an analysis of the clearing obligation for financial counterparties with a 
limited volume of activity. In its response, the ESRB acknowledged that some small financial 
counterparties might face difficulties in gaining access to a CCP in order to meet the clearing 
obligation. However, it encouraged authorities and the industry to solve these issues in order to 
ensure that the clearing obligation is applied broadly. The opinion emphasised that any analysis 
concerning which derivatives classes would be subject to the clearing obligation should consider 
systemic risk not only at the level of the EU, but also at the level of individual Member States. 

c) Macroprudential perspective on the insurance sector 

As insurers can be the source of systemic risks or amplify existing systemic risks, the 
ESRB continued to provide a macroprudential perspective on the insurance sector. This 
sector fulfils an important role in the economy by taking on risks and mobilising savings. The sector 
contributes to economic growth and financial stability if it is functioning well. The ESRB noted in a 
report in 2015 that insurers can, however, also be the source of systemic risk or can amplify it. In 
view of this, the ESRB has continued to provide a macroprudential perspective on the insurance 
sector. 

52   See footnote 7.  
53   ESRB report to the European Commission on the systemic risk implications of CCP interoperability arrangements, 

ESRB, January 2016. 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

38 

                                                           
The ESRB contributed from a macroprudential perspective to work undertaken by the 
European Insurance and Occupational Pensions Authority (EIOPA) on the ultimate forward 
rate (UFR). Insurers’ liabilities – the present discounted value of future promises to policyholders – 
cannot be observed and yet need to be estimated. The UFR is part of the regulatory risk-free yield 
curve that insurers use in this estimation; therefore the level of the UFR has a direct impact on 
insurers’ solvency ratios. Accordingly, the ESRB provided a macroprudential perspective to 
EIOPA’s consultation on a proposal for a methodology to derive the UFR in the form of an informal 
contribution to EIOPA’s Board of Supervisors. In this contribution, the ESRB noted that the large 
majority of its member institutions were of the view that the current level of the UFR may be too 
high. This could lead to a systemic underestimation of the fair value of insurers’ liabilities and a 
build-up of hidden losses. 

The ESRB responded to EIOPA’s public consultation on a potential harmonisation of 
recovery and resolution frameworks for insurers. On 2 December 2016 EIOPA released a 
Discussion Paper on the potential harmonisation of recovery and resolution frameworks for 
insurers. The ESRB had previously noted that, under certain circumstances, failures in the 
insurance sector could pose systemic risks and that an effective recovery and resolution framework 
for the insurance sector could be used to mitigate the financial stability implications of such 
failures. 54 Therefore the ESRB decided to respond to the consultation, providing a macroprudential 
perspective, in the form of an ESRB Secretariat staff response. 55 The staff response argued that 
there is need for a recovery and resolution framework for insurers in the EU and that this framework 
should have a broad scope and financial stability as one of the main objectives, together with 
policyholder protection. Moreover, ESRB Secretariat staff took the view that the framework would 
need to combine a certain degree of harmonisation across the EU with the necessary freedom for 
national authorities to take account of country specificities. In particular, the staff response argued 
for a broad set of recovery and resolution tools which would provide competent authorities with the 
flexibility to tailor each resolution strategy to specific cases. The staff response also stressed that 
further consideration should be given to setting up financing arrangements funded with ex ante 
contributions from the insurance sector, such as ensuring that resolution costs would not be borne 
by taxpayers. 

2.4 

ESRB contributions to stress testing 

Stress tests are important macroprudential tools. They can help ensure the resilience of 
financial institutions and systems to adverse macro-financial developments. By creating 
transparency about remaining vulnerabilities and how such vulnerabilities are to be addressed, they 
can increase confidence in individual financial institutions and the financial system as a whole. 

The ESRB has a key role with regard to stress tests in the EU. In particular, the regulations 
establishing the three European Supervisory Authorities (ESAs) – the EBA, EIOPA and ESMA – 
require them, in cooperation with the ESRB, to initiate and coordinate EU-wide assessments of the 
resilience of financial institutions to adverse market developments, including through stress 

54   Report on systemic risks in the EU insurance sector, ESRB, December 2015; Macroprudential policy beyond 

banking: an ESRB strategy paper, ESRB, July 2016; Macroprudential policy issues arising from low interest rates 
and structural changes in the EU financial system, ESRB, November 2016. 

55   ESRB Secretariat staff response to the EIOPA Discussion Paper on the potential harmonisation of recovery and 

resolution frameworks for insurers (EIOPA-CP-16-009), ESRB, February 2017. 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

39 

                                                           
testing. 56 This cooperation has typically taken the form of the ESRB providing adverse scenarios 
for the stress tests of the ESAs that take as their starting point the risks identified by the ESRB (see 
Section 1 for a description of the risks the ESRB considered most pertinent). Over the review 
period the ESRB provided adverse scenarios to the stress test of CCPs by ESMA and the stress 
test of occupational pension funds by EIOPA. These scenarios are detailed below. The scenarios 
the ESRB provided in early 2016 to the EBA banking sector stress test and the EIOPA insurance 
sector stress test have been described in the ESRB’s 2015 Annual Report. 57 

In view of the differences in the financial products cleared by CCPs, the ESRB contributed 
three scenarios to ESMA’s CCP stress test. CCPs were set up to reduce systemic risk resulting 
from a complex web of bilateral exposures. As a CCP is the counterparty to all its clearing 
members, it is systemic by its very nature and its default could endanger a significant part of the 
financial system. For this reason, CCPs are designed to be particularly resilient. The ESRB’s 
contribution to the ESMA stress test of CCPs had to take into account the specificities of CCPs, 
including their business model and the regulatory requirements imposed on them. In particular, to 
account for differences in the financial products that CCPs clear and to ensure that all CCPs are 
subjected to sufficient stress, the ESRB provided ESMA with three scenarios representing adverse 
financial market developments. 

The scenarios for the CCP stress test assumed a surge in risk premia, leading to major 
shifts in market prices across a broad range of asset classes and increased volatility. The 
ECB, in collaboration with the ESRB, developed a novel methodology and calibrated adverse 
financial scenarios for this exercise. The ESRB assumed that a release of new information or data 
that hints at a likely or actual materialisation of one or more of the risks identified by the ESRB (see 
Section 1) would trigger the scenario. This, in turn, was assumed to result in a surge in risk premia, 
leading to major shifts in market prices across a broad range of asset classes. It was assumed that, 
in such an event, market price movements would be coupled with increased volatility. The 
dependence between asset prices observed during normal times was deemed likely to change 
materially during a short period of time, with no clear direction of safe-haven flows across countries 
and markets. While such unprecedented asset price movements were considered to be short lived 
and global financial markets might stabilise swiftly, it was assumed that a broad range of financial 
markets would undergo pronounced stress lasting for at least five days. 

The ESRB contributed one scenario to EIOPA’s occupational pension fund sector stress 
test. In some EU Member States, institutions for occupational retirement provision (hereafter 
“pension funds”) play a key role in the provision of retirement savings. Understanding how pension 
funds are affected by adverse market movements is thus important and for this reason the ESRB 
contributed to the EIOPA 2017 stress test by providing an adverse scenario. The scenario has 
been designed for the harmonised valuation of defined-benefit (DB) and hybrid pension funds, 
using a common balance sheet approach and the market valuation of assets of defined-contribution 

56   See Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a 
European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing 
Commission Decision 2009/78/EC (OJ L 331, 15.12.2010, p. 12); Regulation (EU) No 1094/2010 of the European 
Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Insurance 
and Occupational Pensions Authority), amending Decision No 716/2009/EC and repealing Commission Decision 
2009/79/EC (OJ L 331, 15.12.2010, p. 48); and Regulation (EU) No 1095/2010 of the European Parliament and of the 
Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), 
amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC (OJ L 331, 15.12.2010, p. 84). 

57   Annual Report, ESRB, 2015. 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

40 

                                                           
(DC) pension funds. 58 Assumptions about long-term risk premia, which are needed for other 
components of EIOPA’s stress test, were developed by EIOPA. 

The scenario for EIOPA was designed to explore how resilient occupational pension funds 
would be to a “double hit” scenario. The ECB, in collaboration with the ESRB, developed the 
narrative and methodology and calibrated the adverse financial scenario for this exercise. In view of 
their sizeable investment portfolios and long-term liabilities, DB pension funds are particularly 
vulnerable to a “double hit” scenario, which would be characterised by an abrupt and large drop in 
asset prices in conjunction with a decrease in risk-free interest rates. To take this into account, the 
adverse scenario is triggered by a shock to EU equity markets. In response, risk premia for a 
number of other asset classes to which pension funds are exposed would increase, leading to 
losses in the asset holdings of pension funds. Risk-free interest rates were assumed to fall further 
in the scenario, reflecting a continuation of structural demographic changes associated with a 
further drag on productivity growth and cyclically low interest rates as a result of accommodative 
central bank policy, thus increasing the present value of pension liabilities. 

The ESRB complemented the EBA stress test with a survey designed to better understand 
second-round effects from the collective reaction of banks to a stress event. The global 
financial crisis revealed that the way in which financial institutions respond to shocks can amplify an 
initial shock that hits the financial system. As the EBA stress test is not designed to capture these 
second-round effects, the ESRB had – in addition to providing the adverse scenario described in 
the 2015 Annual Report – designed a survey to better understand these effects. The survey was 
sent to the 30 largest banks in the EU, and the results were discussed with participating banks at a 
workshop in October 2016. The exercise showed that these second-round effects can be large and 
that banks might find it difficult to take account of and internalise the actions of other banks when 
considering their own response to a stress event. 

3 

Review of national measures 

This subsection provides a general overview of the measures adopted by Member States 
during the review period. 59 Given its broad mandate and EU-wide perspective, the ESRB is well 
placed to act as an information hub on macroprudential measures taken by Member States. The 
ESRB publishes any such notified measures on its website. Actions taken by Member States in the 
review period are discussed in this subsection according to the different types of instruments used, 
including reciprocating actions taken in response to requests from other Member States. 

3.1 

Overview of measures 

In 2016 most elements of macroprudential frameworks were in place and fully operational in 
all Member States. It was the first year when all Member States set the countercyclical capital 
buffer (CCyB) on a quarterly basis and carried out the annual review of the designation and the 
setting of buffer rates for other systemically important institutions (O-SIIs), leading to a higher 

58   EIOPA proposed the common balance sheet approach, which entails a market-based, risk-sensitive valuation for pension 

funds’ balance sheets. See Opinion to EU Institutions on a Common Framework for Risk Assessment and 
Transparency for IORPs, EIOPA-BoS-16/075, 14 April 2016.  

59   For further details on measures taken throughout 2016, see A Review of Macroprudential Policy in the EU in 2016, 

ESRB, April 2017. 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

41 

                                                           
number of macroprudential decisions than in previous years. In addition, there was a large increase 
in the number of reciprocating actions taken compared with previous years owing to the 
implementation of the voluntary reciprocation framework developed by the ESRB. 

When considering instruments that are not subject to a periodic review, around half of the 
Member States actively took macroprudential policy actions in 2016. Most of these were 
tightening actions, predominately relating to the residential real estate sector (see Chart 22). 
Several Member States tightened measures that were already in place. 

Chart 22 

Number of substantial measures notified to the ESRB (2014-16), excluding instruments 
subject to a periodic review  

(number of measures by measure type (left-hand panel) and by Member State (right-hand panel)) 

2014
2015
2016

7

6

Reciprocation (recognition)

4

Systemic risk buffer (SRB)

Loan-to-value (LTV)

Other

4

2

Debt-service-to-income (DSTI)

3

1

4

Liquidity ratio

5

1

Art 124 - Risk weights on CRE

4

2

17

5

5

3

3

3

Loan maturity

2

1

1

Loan amortisation

2

1

1

Pillar II

3

Risk weights (other)

1

2

Stress test / sensitivity test

2

1

Art 124 - Risk weights on RRE

Art 458 -  Risk weights

Loan-to-income (LTI)

Loan-to-deposit (LTD)

Leverage ratio

1

1

1

1

2

1

1

0

5

1

4

3

2

3

2

4

4

1

SK
HU
SE
DK
CZ
NO
EE
IE
UK
LT
SI
NL
LU
HR
LV
BE
RO
BG
PT
FR
MT
FI
CY
AT

7
5

5

3

2

3
1

1

1

2

4
4
4

2

2

2

2

2

2

2
2
2

3

1

1
1

1

1

1

1

1

1
1
1
1

5

10

15

20

25

0

5

10

15

Source: ESRB. 
Notes: All measures are deemed to be substantial apart from measures of a more procedural or administrative nature (such as the early introduction 
of the capital conservation buffer and exemption of small and medium-sized investment firms from the capital conservation buffer). The chart does 
not include the countercyclical capital buffer and the buffers of systemically important institutions because of the periodical setting of the buffer rate. 

A number of CCyB developments took place in 2016. Five countries confirmed or announced a 
non-zero CCyB rate and three countries increased the level of the CCyB in 2016 (with one of these, 
the United Kingdom, decreasing the rate shortly thereafter to its initial level, as discussed in 
subsection 3.2 below). The framework for the CCyB for third (i.e. non-EU) countries developed by 
the ESRB also became operational in 2016 with the identification and monitoring of third countries 
that are material for the EU and for individual Member States, as discussed in Box 1 in Section 1. 

Residential real estate lending continued to be an important area of focus for 
macroprudential authorities in 2016. The ESRB issued warnings to eight Member States on 
medium-term vulnerabilities in the residential real estate sector; the ESRB further issued 
Recommendation ESRB/2016/14 on closing real estate data gaps (see subsection 1.1 above). 
Several Member States introduced measures to target risks from residential real estate while others 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

42 

 
tightened existing measures. Many measures were aimed at maintaining prudent lending standards 
as well as addressing the risks emanating from the different stretches (collateral, household and 
banking). 

The systemic risk buffer continues to be one of the most frequently used instruments, but 
measures taken in 2016 mainly entailed changes to existing frameworks; there were no 
instances of a Member State introducing a new systemic risk buffer. As discussed by the 
ESRB in A Review of Macroprudential Policy in the EU in 2016 60, the implementation of this 
instrument continues to vary significantly across countries, both in terms of scope of the buffer and 
the type of risk being addressed. Under Union law, the systemic risk buffer must be reviewed at 
least every second year. 

This year saw the first annual review by national authorities of the framework for 
systemically important institutions across all Member States. All Member States identified 
systemically important institutions and started imposing capital buffer requirements, with phase-in 
periods of up to four years. Around 200 institutions were identified in the EU (and in Norway), many 
of which are part of 30 larger cross-border groups. The majority of these institutions were credit 
institutions but 6 investment firms were identified as systemically important in Cyprus. The number 
of the identified institutions varies across countries, from 16 in the United Kingdom to 2 in Estonia; 
the characteristics of these institutions also varied significantly across countries. 

Finally, 2016 also saw the implementation of the voluntary reciprocity framework developed 
by the ESRB. Reciprocity was recommended for a real estate measure adopted by Belgium under 
Article 458 of the CRR and a systemic risk buffer measure taken by Estonia. The response to these 
two recommendations shows that the ESRB’s new reciprocity framework has led to a substantial 
increase in reciprocating actions. However, it also shows that the decision whether or not to 
reciprocate differs widely across Member States. 

3.2 

The countercyclical capital buffer 

a) Setting of domestic buffers 

During the review period, five countries confirmed or announced non-zero CCyB rates (see 
Chart 23). These include the Czech Republic, Norway, Slovakia, Sweden and the United Kingdom. 
Sweden and Norway had positive CCyB rates which were already in effect in 2016. In March 2016 
Sweden decided to increase its rate from 1.5% to 2% (to take effect in March 2017). In December 
2016 Norway decided to increase its rate from 1.5% to 2% (to take effect in December 2017). The 
Czech Republic had already decided on a 0.5% buffer rate (effective from January 2017) and 
confirmed this in the period under review. 

Two countries announced non-zero CCyB rates for the first time in 2016. Slovakia set a 0.5% 
rate in July 2016 and the United Kingdom announced a 0.5% rate in March 2016, with both rates 
due to come into effect one year later. The United Kingdom reduced the rate to 0% with immediate 
effect following the outcome of its referendum on membership of the EU and the resulting material 
change in risk outlook. This marks the only experience to date in the EU of a buffer release. 

60 See A Review of Macroprudential Policy in the EU in 2016, op. cit.  

ESRB Annual Report 2016 
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43 

                                                           
The credit-to-GDP gap is the main reference indicator in setting the CCyB rate, but the ESRB 
recommends a range of additional indicators that may point to a build-up of system-wide 
risk. The EU rules on the CCyB framework are complemented by guidance from the ESRB, 
including a recommendation on the setting of CCyB rates. 61 Member States take a wide variety of 
approaches to the number and types of additional indicators used in their decision to activate or 
increase the CCyB. While some countries use only a small number of additional indicators, others 
are monitoring more than 15 additional indicators. 62 

Chart 23 

Countries that applied a non-zero CCyB rate 

(percentages, according to implementation date) 

Sweden                                                                                                                       
Norway
Czech Republic
Slovakia
United Kingdom

2.5

2.0

1.5

1.0

0.5

0.0

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2015

2016

2017

Source: ESRB.  
Notes: The United Kingdom’s decision at the end of March 2016 on a future buffer rate of 0.5% was subsequently changed to a buffer rate of 0% in 
early July 2016. This has been reflected in a single bar for the United Kingdom for the second quarter of 2017.  

The first experiences with the CCyB confirm that there is no mechanical relationship 
between the credit-to-GDP gap and the level of the buffer set by authorities. Analyses show 
that while there is a clear positive relationship between the two, it does not mechanically follow the 
buffer guide laid out in the recommendation. Indicators from the categories recommended by the 
ESRB also show a clear relationship between their levels and buffer rates, particularly for those 
indicators related to the overvaluation of residential real estate prices, credit developments and the 
strength of banks’ balance sheets. 

b) Setting of buffers for third countries 

The framework for the CCyB for third (i.e. non-EU) countries developed by the ESRB 
became operational in 2016. Under this framework, both Member States and the ESRB share the 

61   Recommendation ESRB/2014/1 on guidance for setting countercyclical buffer rates. 
62   Pekanov, A. and Dierick, F., “Implementation of the countercyclical capital buffer regime in the European Union”, 

ESRB Macro-prudential Commentaries, No 8, December 2016. 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

44 

 
                                                           
responsibility of identifying and monitoring material third countries. 63 The ESRB identifies third 
countries to which the EU banking system as a whole has material exposures, reviews this list 
annually, and monitors developments in these countries for signs of excessive credit growth. 
Member States also identify and monitor third countries to which the banking system has material 
exposures in their respective jurisdictions. Member States may decide not to monitor certain third 
countries, relying instead on the monitoring already carried out by the ESRB.  

The ESRB established an initial list of six material third countries, while the number of 
material third countries for individual Member States varies widely. The ESRB’s list 
comprises, in descending order of exposures by the EU banking sector, the United States, Hong 
Kong, China, Turkey, Brazil and Russia. The number of identified material third countries ranges 
from zero (nine Member States) to eleven (the Netherlands). The overlap in the identification of 
countries is highest for the six material countries identified by the ESRB, varying from thirteen for 
the United States to two for Hong Kong. 

The majority of Member States apply the same methodology used by the ESRB when 
identifying material third countries, although how these countries are monitored can differ. 
While the ESRB methodology for identifying material third countries is prescriptive for the ESRB but 
not for the Member States, most countries opted to apply the methodology in its original form or 
with slight amendments. Member States take different approaches to monitoring the six material 
countries identified and already monitored by the ESRB. Thirteen Member States entrust the 
monitoring of these six material third countries to the ESRB, while four Member States also monitor 
the countries themselves, in some cases for other reasons as well. 

3.3 

Real estate measures 

Real estate, mainly the residential sector, was a particular area of focus for macroprudential 
policymaking by the ESRB and its members in 2016. This reflects the importance of real estate 
markets to financial stability and signs of emerging vulnerabilities in the residential real estate 
markets of some Member States. The ESRB issued warnings to eight Member States on 
medium-term vulnerabilities in the residential real estate sector and adopted Recommendation 
ESRB/2016/14 on closing real estate data gaps (see subsection 1 above for further details). 

A range of measures to address residential real estate risks were introduced at national 
level throughout 2016, mostly relating to borrower-based measures. The most frequent 
measures taken to address residential real estate risks during the review period were those 
concerning lending standards. Some Member States tightened or amended such measures already 
in existence. Some Member States announced or confirmed measures relating to risk weights on 
residential or commercial property lending. Belgium requested an extension of an existing measure 
introduced under Article 458 of the CRR, which applied a 5 percentage point risk weight add-on for 
Belgian residential mortgage loans by banks using the IRB approach for measuring credit risk. 64 

63   Recommendation ESRB/2015/1 on recognising and setting countercyclical capital buffer rates for exposures to 
third countries and Decision ESRB/2015/3 on the assessment of materiality of third countries for the Union’s 
banking system in relation to the recognition and setting of countercyclical buffer rates. 

64   A review of macro-prudential policy in the EU one year after the introduction of the CRD/CRR, ESRB, June 2015, 

pp. 18 and 23. 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

45 

                                                           
The European Commission, drawing on an opinion by the ESRB 65 and the EBA, did not object to 
this extension. 66 At the request of the Belgian authorities, the ESRB recommended reciprocation of 
the measure under Recommendation ESRB/2015/2. 67 Several Member States, including France 
and the Netherlands, both of which hold a significant share of the mortgage loans market in 
Belgium, reciprocated the measure, although their banks operate mostly through subsidiaries. 

A helpful typology for grouping real estate instruments is the classification in household 
stretch (or borrower stretch), collateral stretch and lender stretch instruments. 68 The first 
covers instruments that target the repayment capacity of the borrower, such as caps on 
loan-to-income, debt-to-income, profit-to-income and debt-service-to-income ratios; the second 
refers to instruments that focus on the collateral of the loans, such as caps on loan-to-value (LTV) 
ratios; the third category points to instruments that directly increase the resilience of the lender, 
such as risk weights, sectoral capital buffers and stress tests with capital add-ons. Some 
instruments have a hybrid character. Amortisation requirements, for example, affect both the 
repayment burden (household stretch) and also bring down the LTV ratio over time (collateral 
stretch). 

Most Member States addressing vulnerabilities originating from the residential real estate 
sector now have a combination of such instruments in place (see Chart 24). 69 Different 
stretches cover different risk channels, and a combination of instruments may increase the overall 
effectiveness of the measures. 

65   Opinion ESRB/2016/1 regarding Belgian notification of an extension of the period of application of a stricter 

measure based on Article 458 of Regulation (EU) No 575/2013 of the European Parliament and of the Council on 
prudential requirements for credit institutions, ESRB, 18 February 2016. 

66   Decision not to propose an implementing act to reject the intended extension of the national measure under Article 458 of 
Regulation (EU) No 575/2013 notified by the Kingdom of Belgium under Article 458(9) in conjunction with Article 458(4) of 
Regulation (EU) No 575/2013, European Commission, 15 March 2016. 

67   The ESRB issued Recommendation ESRB/2016/3, which amends Recommendation ESRB/2015/2, to include the Belgian 

measure among the measures to be reciprocated. 

68   Report on residential real estate and financial stability in the EU, ESRB, December 2015, pp. 86 et seq.  
69   For a discussion on commercial real estate, see A Review of Macroprudential Policy in the EU in 2015, ESRB, May 

2016, pp. 20-23. 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

46 

                                                           
Chart 24 

Use of residential real estate instruments according to the stretches typology 

lender stretch

household stretch

BE

DK, EE, FI, IE, LT, 
PL, RO, SK, SE, UK

LU, MT, NO

CY, HU, NL, SI

AT, CZ, LV

collateral stretch

Source: ESRB. 
Note: Amortisation requirements have been included under both the household and the collateral stretch categories.  

3.4 

Systemic risk buffer 

The systemic risk buffer continues to be a macroprudential instrument that is often used, 
although this varies widely across countries. While the measures taken during the review 
period were mainly changes to existing systemic risk buffer frameworks, these reflect the broad 
range of uses of this instrument. In its response to the European Commission’s consultation 
document on the Review of the EU Macro-prudential Policy Framework (see subsection 2.1 above), 
the ESRB pointed out that the flexibility of the systemic risk buffer creates the risk of adversely 
affecting the use of other instruments for their intended purpose, and that there would be merit in 
further clarifying and improving the rules regarding the use of this buffer. 

A number of Member States made changes to the systemic risk buffer following changes in 
their systemically important institutions. Some Member States use the systemic risk buffer as 
an alternative to the O-SII buffer or to top up the O-SII buffer. Hence, when changes are made in 
the identification of O-SIIs or in O-SII buffer levels, this may also result in a recalibration of the 
systemic risk buffer. The Czech Republic reviewed the list of O-SIIs in 2016 and increased the 
number of banks (from four to five) as well as some of the applicable buffer rates. These changes 
came into effect in 2017. Denmark also uses the systemic risk buffer to mitigate the risk from 
systemically important banks and made a change to the list of O-SIIs from 2017 onwards following 
a change in the legal structure in the Nordea group. Slovakia uses the systemic risk buffer in 
combination with the O-SII buffer to reach a target aggregate buffer for five O-SIIs. During the 
review period, these buffers were recalibrated following the identification of the parent banks of four 
of these institutions as O-SIIs in their home countries (Austria, Belgium and Italy). In the United 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

47 

 
Kingdom, the Bank of England’s Financial Policy Committee published its framework for the 
systemic risk buffer. 70 This buffer will be applied to systemically important institutions from 2019. 

Other changes to the systemic risk buffers were made for a range of reasons. Estonia 
reduced the systemic risk buffer from 2% on total exposures to 1% on domestic exposures from the 
third quarter of 2016 onwards in order to avoid double-counting with the O-SII buffer. The O-SII 
buffer was introduced at this time for two institutions that hold more than 60% of total banking 
sector assets. The ESRB recommended reciprocation of this measure, following a request from the 
Estonian authorities. 71 The Member States that decided to reciprocate the Estonian systemic risk 
buffer included Sweden, which is the most important home country in terms of foreign banks with 
operations in Estonia. The objective of the planned systemic risk buffer in Hungary is to address 
systemic risk from problem exposures to the commercial real estate sector and to incentivise banks 
to deal with these exposures. During the year, Hungary decided to postpone the introduction of this 
buffer until 1 July 2017, six months later than originally planned, in order to support lending to the 
economy. Romania announced that the systemic risk buffer would be deactivated from 1 March 
2017 onwards. The buffer was introduced in 2016 to address the external contagion risk arising 
from certain bank ownership structures. The deactivation is due to the perceived reduction in this 
contagion risk, the activation of the O-SII buffer and legislative developments at national level that 
may lower the capital adequacy of banks. Austria introduced the systemic risk buffer in 2016 to 
address the risks stemming from a combination of factors. These include Austria’s relatively large 
banking system; high exposure to emerging markets; the Austrian banking system’s insufficient 
preparation for the reduction/removal of the implicit government guarantee; the banking system’s 
low level of capitalisation in relation to European peers; and the specific ownership structure of 
institutions (high share of non-stock companies) that renders recapitalisation difficult in times of 
crisis. 

3.5 

Buffers for systemically important institutions 

All Member States completed the review of the list of identified O-SIIs during the review 
period. Around 200 O-SIIs have now been identified in the EU (and in Norway), ranging from 16 in 
the United Kingdom to 2 in Estonia. The majority of these are credit institutions, with only 
6 investment firms identified as systemically important (in Cyprus). While some changes to the list 
of O-SIIs and the accompanying buffer rates did take place in 2016, these were often due to 
corporate restructurings, changes in the systemic risk score of institutions or changes in the 
methodology for setting O-SII buffers. 72 For the most part, the list and buffer rates of O-SIIs 
remained relatively unchanged. Of the European O-SIIs, 13 are also global systemically important 
institutions (G-SIIs); these are located in France, Germany, Italy, the Netherlands, Spain, Sweden 
and the United Kingdom. 

70   The Financial Policy Committee’s framework for the systemic risk buffer, Bank of England, May 2016. 
71   The ESRB issued Recommendation ESRB/2016/4, which amends Recommendation ESRB/2015/2, to include the 

Estonian measure among the measures to be reciprocated. 

72   The ECB has adopted a methodology for assessing O-SII buffers set by national authorities, in line with its responsibilities 
under Article 5 of Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European 
Central Bank concerning policies relating to the prudential supervision of credit institutions (OJ L 287, 29.10.2013, p. 63). 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

48 

                                                           
Chart 25 

O-SII buffer requirements for credit institutions as at January 2017 

average
minimum-maximum  range

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

EE
(2)

NO
(2)

SE
(4)

LT
(4)

HR
(9)

FI
(4)

SK
(5)

RO
(9)

NL
(5)

BE
(8)

MT
(3)

FR
(6)

AT
(7)

PL
(12)

LU
(6)

DE
(14)

ES
(6)

HU
(8)

BG
(10)

UK
(16)

SI
(8)

IE
(7)

CY
(6)

CZ
(7)

DK
(6)

LV
(6)

PT
(6)

GR
(4)

IT
(3)

Source: ESRB. 
Notes: Figures in brackets denote the number of other systemically important institutions (O-SIIs) in each country. “Average” refers to the arithmetic 
average of the phased-in buffers for the O-SIIs in the country concerned as at 1 January 2017. The Czech Republic, Denmark, Ireland, Greece, Italy, 
Cyprus, Latvia, Portugal, Slovenia and the United Kingdom do not have applicable buffer rates as at 1 January 2017. 

The characteristics of O-SIIs and the buffer rates applied vary considerably across 
countries, reflecting to some extent different national banking systems. In general, the larger 
the country, the larger the average size of the O-SII, but there are exceptions. The level and 
dispersion of O-SII buffer rates and phase-in periods are also different across Member States. The 
highest buffer requirements coming into force in 2017 were in Estonia, Sweden and Norway. Many 
Member States have not yet put O-SII buffers in place for 2017 or set them at 0%. Most countries 
have a range of buffer rates for different institutions. Phase-in periods range between two and four 
years, while some countries opt to introduce buffer rates with immediate effect. In 2016, 13 Member 
States started phasing in the O-SII buffer. Recently, the ESRB and the ECB have started to publish 
overviews of the different capital buffers applicable in the EU and the euro area. 73 

Many O-SIIs are part of bigger cross-border banking groups where the parent entity is an 
O-SII or G-SII located in another Member State. Around 30 such cross-border groups can be 
identified and some groups control O-SIIs in up to 10 different Member States. Groups with a 
particularly strong cross-border presence through many O-SIIs include the Erste, Raiffeisen, 
Société Générale and UniCredit groups. From a financial stability perspective, cross-border 
ownership links may be a potential transmission channel for risks. 

73   Example overview of the different capital buffers applicable in the EU and the euro area. 

ESRB Annual Report 2016 
Section 2 – Policies addressing systemic risk 

49 

 
                                                           
Section 3 – Ensuring implementation and accountability 

This section provides an overview of the action taken to enhance the ESRB’s accountability. 
First, it explores how compliance with the ESRB’s recommendations is assessed by examining the 
results from the follow-up processes carried out in the reporting period. Second, it gives an account 
of the ESRB’s reporting to the European Parliament, including the presentations given by the Chair 
of the ESRB at the hearings before the Committee on Economic and Monetary Affairs and other 
institutional aspects. Finally, this section concludes with a brief description of the ESRB’s 
institutional framework. 

1 

Assessment of compliance with ESRB recommendations 

ESRB recommendations are not legally binding but are subject to an “act or explain” 
regime. This means that the addressees of recommendations – such as Member States, national 
supervisory authorities (NSAs), national macroprudential authorities and European institutions – 
have an obligation to communicate to the ESRB and the EU Council the actions they have taken to 
comply with a recommendation, or to provide adequate justification in the case of inaction. In order 
to provide guidance to addressees on how to assess the implementation of ESRB 
recommendations, the Handbook on the follow-up to ESRB recommendations (hereafter the 
“Handbook”) was published in July 2013. The Handbook was revised in order to take into account 
the experience gained during past compliance assessments. The amended version of the 
Handbook was approved by the General Board in April 2016. The main changes include (1) a 
reconfiguration of the pre-assessment phase, which is crucial for addressees and assessors in 
terms of the correct implementation and assessment of the recommendations; (2) strengthened 
communication between the relevant addressees of the recommendations and the assessment 
team members; and (3) a revised methodology for assigning weights and grading. 

The following paragraphs outline the four compliance assessments conducted throughout 
the reporting period. The compliance assessments were undertaken for Recommendation 
ESRB/2012/1 on money market funds, Recommendation ESRB/2012/2 on funding of credit 
institutions, Recommendation ESRB/2013/1 on intermediate objectives and instruments of 
macroprudential policy, and Recommendation ESRB 2015/1 on recognising and setting 
countercyclical buffer rates for exposures to third countries. 

1.1 

Assessment of compliance with Recommendation ESRB/2012/1 on money 
market funds  

This ESRB Recommendation aimed to reduce the systemic risks arising from money market 
funds (MMFs). A recommendation was made to the European Commission to ensure, through 
European Union (EU) legislation, the implementation of the change from a constant to a fluctuating 
net asset value model, the introduction of stricter liquidity requirements, the public disclosure of 
specific information by MMFs and the adoption by MMFs of enhanced reporting obligations to 
supervisory authorities. 

ESRB Annual Report 2016 
Section 3 – Ensuring implementation and accountability 

50 

The assessment of compliance with this Recommendation started in June 2016 and initially 
focused on the original legislative proposal of the European Commission. 74 However, as an 
agreement between the co-legislators was reached at the end of 2016 and publication of the final 
EU Regulation on MMFs in the Official Journal of the European Union was pending at the end of 
March 2017, it was decided to take into account an analysis of the final legislation in the ESRB’s 
Summary Compliance Report. Therefore, finalisation of the compliance assessment and publication 
of the compliance report for this Recommendation were postponed. 

1.2 

Assessment of compliance with Recommendation ESRB/2012/2 on 
funding of credit institutions 

Recommendation ESRB/2012/2 on funding of credit institutions seeks to incentivise 
sustainable funding structures for credit institutions and mitigate related systemic risks. It 
recommends that the NSAs intensify their assessments of funding and liquidity risks, monitor credit 
institutions’ plans to reduce reliance on public sector funding sources, and assess the impact of 
credit institutions’ funding plans on the flow of credit to the real economy. Moreover, it also 
recommended that the European Banking Authority (EBA) should develop guidelines on 
harmonised definitions and templates in order to facilitate the reporting of funding plans and 
coordinate their assessment at EU level. 75 

Furthermore, the Recommendation addressed risks arising from management policies, 
asset encumbrance and market transparency. More specifically, NSAs were requested to 
establish a requirement for credit institutions to put in place risk management policies and general 
monitoring frameworks for managing the risks related to asset encumbrance. Concurrently, the 
EBA was requested to issue guidelines on the monitoring of the level, evolution and types of asset 
encumbrance, as well as transparency requirements on asset encumbrance for credit institutions. 

Finally, the Recommendation deals with covered bonds and other instruments that generate 
encumbrance. In this respect, the NSAs were required to identify best practices for covered bonds 
and to promote harmonisation of their national frameworks. The EBA was requested to coordinate 
the action taken by NSAs, to consider whether it is appropriate to issue guidelines or 
recommendations endorsing best practices, and to assess whether there are other financial 
instruments that generate encumbrance. 

In general, the Summary Compliance Report showed a particularly high level of compliance 
by addressees. The NSAs were graded either fully compliant (FC) or largely compliant (LC) not 
only with the Recommendation as a whole, but also with each specific sub-recommendation. A 
similar result can be observed for the level of compliance achieved by the ECB and the EBA, which 
were also assessed overall as being fully compliant. As the main aim of this Recommendation was 
to enhance the monitoring of risks stemming from recent developments in banks’ funding sources 
and structures within the EU, the results of the assessments show a clear commitment on the part 
of the NSAs, the EBA and the ECB (see Table 2). 

74   Proposal for a Regulation of the European Parliament and of the Council on Money Market Funds, 4 September 

2013, COM/2013/0615 final. 

75   This sub-recommendation A(5) will be assessed in the course of 2017. 

ESRB Annual Report 2016 
Section 3 – Ensuring implementation and accountability 

51 

                                                           
Table 2 

Addressees’ compliance with Recommendation ESRB/2012/2 on funding of credit 
institutions 

A 

FC 

FC 

LC 

FC 

FC 

FC 

FC 

FC 

FC 

LC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

LC 

FC 

FC 

FC 

B 

FC 

FC 

FC 

FC 

LC 

FC 

FC 

FC 

FC 

FC 

LC 

FC 

LC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

LC 

FC 

FC 

FC 

FC 

LC 

LC 

FC 

SE 

C 

FC 

FC 

LC 

FC 

FC 

LC 

FC 

FC 

FC 

FC 

FC 

FC 

LC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

LC 

FC 

FC 

LC 

FC 

FC 

LC 

FC 

FC 

LC 

fully compliant 

largely compliant 

partially compliant 

materially non-compliant 

non-compliant 

BE 

BG 

CZ 

DK 

DE 

EE 

IE 

GR 

ES 

FR 

HR 

IT 

CY 

LV 

LT 

LU 

HU 

MT 

NL 

AT 

PL 

PT 

RO 

SI 

SK 

FI 

SE 

UK 

ECB 

EBA 

FC 

LC 

PC 

MN 

NC 

D 

FC 

SE 

IE 

E 

FC 

SE 

SE 

FC 

FC 

SE 

FC 

FC 

FC 

LC 

SE 

FC 

SE 

SE 

SE 

FC 

SE 

SE 

FC 

FC 

LC 

FC 

FC 

FC 

LC 

LC 

FC 

FC 

FC 

Overall grade 

FC 

FC 

LC 

FC 

FC 

FC 

FC 

FC 

FC 

LC 

FC 

FC 

LC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

LC 

FC 

FC 

FC 

FC 

LC 

LC 

FC 

FC 

FC 

inaction sufficiently explained 

inaction insufficiently explained 

ESRB Annual Report 2016 
Section 3 – Ensuring implementation and accountability 

52 

  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
However, a number of issues that were not entirely within the scope of the Recommendation 
were also identified during the assessment process, leading to further analysis and 
discussion. One such issue was related to the allocation of tasks between the ECB and the NSAs 
following the establishment of the Single Supervisory Mechanism (SSM), which had taken place 
during the assessment phase and could not have been fully foreseen at the time of drafting the 
Recommendation. In addition, new legislative initiatives contributed to the effective implementation 
of this Recommendation, notwithstanding the fact that the addressees benefited from the policy 
inputs proposed by the ESRB. Finally, although the heterogeneous nature of the information 
collected during the assessments does not allow for in-depth cross-country comparisons and 
definitive conclusions, it can be concluded that the Recommendation largely contributed to the 
adoption of new frameworks, common monitoring procedures and best practices to address risks 
arising from secured and unsecured funding sources used by credit institutions. 

1.3 

Recommendation ESRB/2013/1 on intermediate objectives and 
instruments of macroprudential policy – Summary Compliance Report 

On 4 April 2013 the ESRB published a Recommendation on intermediate objectives and 
instruments of macroprudential policy (ESRB/2013/1) to pursue the ultimate objective of 
macroprudential policy, which is to safeguard the financial system as a whole. The 
Recommendation was addressed to national macroprudential authorities, Member States and the 
European Commission. This Recommendation was aimed at defining intermediate macroprudential 
policy objectives, in order to facilitate the attainment of the ultimate objective: the safety and 
soundness of the financial system as a whole. The intermediate objectives cover five target areas 
and should be linked to at least one relevant instrument selected by the national competent 
authority or NSA. The Recommendation included an indicative list of instruments for each 
intermediate objective. Moreover, it recommended that a comprehensive strategy for 
macroprudential policy should be devised and that this framework should be evaluated periodically. 

The assessment of the implementation of the Recommendation across the EU Member 
States was completed by the end of January 2017. The Summary Compliance Report for 
Recommendation ESRB/2013/1 reveals a very high level of implementation by Member States, 
with intermediate objectives, macroprudential instruments and macroprudential strategies having 
been largely embedded in their frameworks (see Table 3).  

The results show that all Member States pursue the intermediate objectives of 
macroprudential policy recommended by the ESRB and link them to specific 
macroprudential instruments. The adoption of macroprudential instruments has been assisted, in 
particular, by the implementation of the Capital Requirements Regulation and Directive (CRR/ 
CRD IV) legislative package at the national level across the EU, fostered by the European 
Commission. In many cases, the instruments focus on the banking sector owing to the bank-centric 
nature of most Member States’ financial systems and to real estate market developments in some 
countries, which have induced authorities to consider the introduction of non-harmonised 
instruments. As a result, further improvements are possible in terms of monitoring potential 
macroprudential risks arising from the non-banking system and all types of financial infrastructures, 
including payment systems, deposit guarantee schemes and clearing through central 
counterparties. 

As outlined in this Report, in many cases a comprehensive macroprudential policy strategy 
has been developed. In most cases, the involvement of the macroprudential authorities in the 
development and implementation of recovery and resolution plans and of deposit guarantee 

ESRB Annual Report 2016 
Section 3 – Ensuring implementation and accountability 

53 

schemes is guaranteed. Furthermore, major progress has been made on establishing effective 
communication between national macroprudential authorities and the ESRB. 

Table 3 
Addressees’ compliance with Recommendation ESRB/2013/1 on intermediate objectives and 
instruments of macroprudential policy 

Weights 

Austria 

Belgium 

Bulgaria 

Croatia 

Cyprus 

Czech Republic 

Denmark 

Estonia 

Finland 

France 

Germany 

Greece 

Hungary 

Ireland 

Italy 

Latvia 

Lithuania 

Luxembourg 

Malta 

Netherlands 

Poland 

Portugal 

Romania 

Slovakia 

Slovenia 

Spain 

Sweden 

United Kingdom 

FC 

LC 

PC 

Overall grade 

Recommendation A 

Recommendation B 

Recommendation C 

40% 

40% 

20% 

FC 

FC 

FC 

FC 

FC 

LC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

LC 

FC 

FC 

FC 

LC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

LC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

LC 

FC 

FC 

FC 

LC 

FC 

FC 

fully compliant 

largely compliant 

partially compliant 

FC 

FC 

FC 

FC 

FC 

LC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

LC 

LC 

LC 

FC 

PC 

FC 

FC 

LC 

FC 

FC 

FC 

FC 

FC 

LC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

FC 

PC 

LC 

FC 

It should be highlighted that Member States have an ongoing responsibility to monitor and 
adjust their macroprudential framework at this initial stage of development of the national 
institutional frameworks and in the light of the changing risks faced by the financial system. 
A large majority of addressees are already in line with the Recommendation in terms of their 
commitment to periodically review their macroprudential framework in order to ensure its 
effectiveness and efficiency. This review also involves reassessing the need for additional 
intermediate objectives and instruments, which, for the moment, are not considered necessary by 
most addressees. 

ESRB Annual Report 2016 
Section 3 – Ensuring implementation and accountability 

54 

 
 
 
 
 
 
 
 
 
 
 
 
 
1.4 

Recommendation ESRB/2015/1 on recognising and setting countercyclical 
buffer rates for exposures to third countries – Compliance Assessment 

On 11 December 2015 the ESRB issued the Recommendation on recognising and setting 
countercyclical buffer (CCyB) rates for exposures to third countries (ESRB/2015/1) to 
mitigate risks arising from excessive credit growth in third countries. The Recommendation is 
addressed to the designated authorities. 

The Recommendation aims to promote a coherent approach across the EU for recognising 
and setting CCyB rates for exposures to third countries in order to prevent an uneven 
playing field and regulatory arbitrage. The Recommendation is intended to ensure that 
designated authorities recognise CCyB rates set by third-country authorities, set CCyB rates for 
exposures to third countries and set lower CCyB rates when risks in a particular third country abate 
or materialise. 

The deadline for addressees to provide information on the level of implementation of 
sub-recommendations B(1), B(2) and D was 31 December 2016. The assessment of compliance 
with these sub-recommendations across EU Member States started in January 2017 and is 
projected to be completed by the end of August 2017. 

2 

Reporting to the European Parliament and other institutional aspects 

The ESRB reports regularly to the European Parliament on its activities pursuant to 
Article 19 of the ESRB Regulation on the discharge of its mandate. 76 In line with this obligation 
to be accountable, the Chair of the ESRB attends hearings before the Committee on Economic and 
Monetary Affairs of the European Parliament (ECON). These hearings are public and are 
transmitted by a webcast accessible via the ESRB’s website. 

The introductory statements of the ESRB’s Chair and Vice-Chairs are published on the 
ESRB’s website. These statements provide the Members of the European Parliament (MEPs) with 
an overview of the ESRB’s stance on current systemic risks arising from the different financial 
sectors and on the macroprudential policy options recommended. 

At the hearings, the ESRB Chair presents policy initiatives that have been adopted in the 
course of the year, with a view to providing MEPs with first-hand information on the 
underlying rationale for them. The main points of the two most recent hearings are summarised 
below. 

At the hearing on 21 June 2016 before ECON, the Chair of the ESRB highlighted the 
contributions made by the ESRB, including: 

• 

• 

the ESRB’s ongoing work on the medium-term implications of low interest rate levels, 
including the ESRB General Board’s discussions on these issues and validation of the 
technical work; 

the development of a strategy for macroprudential policy beyond the banking sector, namely 
through the publication of an ESRB strategy paper; 

76   Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24 November 2010 on European 
Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board (OJ 
L 331, 15.12.2010, p. 1). 

ESRB Annual Report 2016 
Section 3 – Ensuring implementation and accountability 

55 

                                                           
• 

• 

• 

the ESRB’s work on assessing risks to the investment fund and market-making sectors in the 
EU. The ESRB’s data collection exercise covered 274 EU asset management firms and 
1,668 fixed-income investment funds; 

ESRB publications, including but not limited to: ESRB reports on financial stability issues 
related to residential and commercial real estate; a review of macroprudential policy in the EU, 
which discusses the measures implemented across EU countries in 2015; a report by the 
ESRB on systemic risks in the insurance sector; and a report by the Advisory Scientific 
Committee, which contributed significantly to the discussion on financial stability risks 
stemming from climate change;  

the creation of a working group focusing on financial stability issues related to the introduction 
of the new international accounting standard IFRS 9. 

At the hearing before ECON on 28 November 2016, the Chair of the ESRB outlined the 
ESRB’s main achievements and recent measures, including, among other things, the 
following activities undertaken by the ESRB:  

• 

• 

• 

the issuance of eight country-specific warnings on medium-term vulnerabilities in the 
residential real estate sector. The warnings were addressed to the relevant ministers in eight 
Member States, following an EU-wide assessment of vulnerabilities relating to residential real 
estate; 

the publication of the ESRB report on the macroprudential policy issues arising from low 
interest rates and structural changes in the EU financial system. The report was jointly 
produced by the ESRB’s Advisory Scientific Committee and the Advisory Technical 
Committee and the ECB’s Financial Stability Committee, and was considered an excellent 
example of successful cooperation;  

the publication of ESRB Recommendation 2016/14 on the closing of real estate data gaps, 
which covers both the residential and commercial real estate sectors. With this 
recommendation, the ESRB aims to establish a more harmonised framework for monitoring 
developments in real estate markets in the EU.  

Lastly, the Chair of the ESRB observed that the ESRB will continue to exercise its mandate 
of macroprudential oversight of the financial system in the EU. In particular, its oversight 
function includes identifying country-specific financial stability vulnerabilities. The ESRB’s 
institutional set-up allows it to exercise peer pressure and work against inaction bias. This includes 
issuing warnings if a significant systemic risk to financial stability is identified and needs to be 
notified, and issuing recommendations for remedial action. 

In addition to the public hearings, the Chair holds confidential discussions on the work of 
the ESRB with the Chair and Vice-Chairs of ECON, when appropriate. 

The ESRB’s publications are available on its website and include (i) the Macroprudential 
Commentaries, (ii) the Reports of the Advisory Scientific Committee, (iii) the Occasional Paper 
Series, and (iv) the Working Paper Series. The purpose of the Working Paper Series, which was 
launched in February 2016, is to gather research papers on systemic risks and macroprudential 
policy to inform the ESRB’s policymaking. The views expressed in these publications are those of 
the authors and do not necessarily reflect the official stance of the ESRB. The number of papers 
published in the first year of this series reflects the growing interest in the field of macroprudential 
policy within the academic debate. A list of the ESRB’s publications that are available on the 
website can be found in the Annex. 

ESRB Annual Report 2016 
Section 3 – Ensuring implementation and accountability 

56 

In 2016 the ESRB organised a number of conferences and workshops as part of its work 
aimed at fostering discussion on macroprudential policy. The ESRB international conference 
on the macroprudential use of margins and haircuts aimed to gather the views of policymakers, 
representatives from academia and market participants from different jurisdictions on the use of 
margins and haircuts as potential new instruments, and the main benefits and challenges in 
applying them for macroprudential purposes. At the First ESRB Annual Conference, panellists 
debated on the current macroprudential policy stance and the most prominent topics in the policy 
agenda, such as the low interest rate environment, the implications of the central clearing obligation 
to make safer trading on standardised OTC derivatives and the apparent scarcity of safe assets in 
the markets (see Box 4). The ESRB also organised the Conference on Systemic Risk Analytics in 
collaboration with Suomen Pankki – Finlands Bank and RiskLab at the Arcada University of Applied 
Sciences, with the aim of adopting advanced methods and techniques for systemic risk 
identification and assessment. The ESRB held a number of workshops, namely the second ESRB 
annual workshop on shadow banking in September 2016 and an ESRB industry workshop on 
sovereign bond-backed securities in December 2016. 

Box 4 
ESRB Annual Conference on 22-23 September 2016 

On 22-23 September 2016 the ESRB held its first Annual Conference. The Conference included 
three keynote speeches, two policy panel discussions and three academic sessions. The 
proceedings are available to view on the ESRB’s website. 

In his welcome address, the Chair of the ESRB and President of the ECB, Mario Draghi, stated that 
the ESRB’s strength lies in the diversity of its expertise. As such, the ESRB is uniquely placed to 
take a holistic view of the European financial system. Since its creation, the ESRB has contributed 
to building a rich set of macroprudential policy tools for banks, and continues to coordinate the 
calibration of those policies. The ESRB is also at the forefront of research into new macroprudential 
instruments beyond the banking sector. 

In his capacity as Chair of the Advisory Technical Committee, the Governor of Sveriges Riksbank, 
Stefan Ingves, emphasised that the ESRB also benefits from its broad composition. The ESRB’s 
inclusive working methods have enabled it to publish an extensive catalogue of work that 
contributes actively to the general policy debate. In this context, the Vice-President of the European 
Commission, Valdis Dombrovskis, presented the Commission’s consultation document on the 
Review of the EU Macroprudential Policy Framework. The purpose of the consultation is to clarify 
the conditions governing when and how macroprudential measures are used. This includes an 
assessment of whether the existing macroprudential toolkit is sufficient, in both banking and 
non-banking sectors.  

These keynote speeches set the scene for conference discussions, which included policy debates 
on measurement of the macroprudential policy stance and assessment of its effectiveness. Many 
participants noted the complexity of macroprudential policy, for which there are multiple instruments 
to target multiple intermediate objectives. Implementation of this kind of policy is in its formative 
years, but policymakers should nevertheless be prepared to deploy the novel instruments at their 
disposal, since greater risk arises from inaction. Moreover, policymakers can gauge the 
effectiveness of different instruments in mitigating systemic risks through thorough policy 
assessments and simulations. 

ESRB Annual Report 2016 
Section 3 – Ensuring implementation and accountability 

57 

At the Conference, paper presentations were given focusing on the implications of three specific 
systemic phenomena for macroprudential policy: namely low interest rates, derivatives trading and 
the scarcity of area-wide safe assets. Three main insights emerged. First, policy should allow banks 
and other financial institutions to adapt their business models to a prolonged low interest rate 
environment and structural overcapacity. Second, policymakers should complete reforms to 
derivatives markets – notably by mandating central clearing and trading obligations – in order to 
enhance their resilience. Third, in the euro area policymakers could consider addressing the 
scarcity of area-wide low-risk assets by creating sovereign bond-backed securities. 

3 

The institutional framework 

The organisational structure of the ESRB comprises a General Board, a Steering Committee, 
an Advisory Scientific Committee (ASC), an Advisory Technical Committee (ATC) and a 
Secretariat. The ESRB is currently chaired by the President of the ECB, Mario Draghi. The 
General Board, at its 25th regular meeting on 23 March 2017, appointed Philip R. Lane, Governor 
of the Central Bank of Ireland, as Chair of the ATC for a three-year term. Stefan Ingves, Governor 
of Sveriges Riksbank, who has chaired the ATC for the last six years, will remain Chair until the 
General Board meeting in June 2017. Professor Marco Pagano chaired the ASC until 31 December 
2016, and Professor Richard Portes took over this responsibility as of 1 January 2017. The work of 
the ATC and the ASC is supported by a number of expert groups, which are listed in the 
organisational chart available on the ESRB’s website. 77 In line with past editions, the Ieke van den 
Burg prize for research on systemic risk attracted a significant number of outstanding papers. The 
ASC conducts its selection with the support of the ESRB Secretariat. The winning paper will be 
published on the ESRB’s website and presented at the ESRB Annual Conference in the autumn of 
2017. 

The day-to-day business of the ESRB is carried out by its Secretariat. The Head of the ESRB 
Secretariat is Francesco Mazzaferro and the Deputy Head is Tuomas Peltonen. In accordance with 
Council Regulation (EU) No 1096/2010 78 the ECB ensures the functioning of the Secretariat of the 
ESRB and provides it with analytical, statistical, logistical and administrative support. In 2016 the 
ECB provided the ESRB with support in the form of 61.8 full-time equivalent staff. Of these, 
26.8 persons were employed within the Secretariat and 35 persons provided other forms of 
support. The direct costs incurred by the ECB amounted to €9.5 million. The indirect costs relating 
to other support services shared with the ECB (e.g. human resources, IT, general administration) 
must be added to this sum. Over the same period, other member institutions of the ESRB provided 
approximately 55 full-time equivalent staff for analytical support within the context of ESRB groups 
and ESRB chair positions. 

77   ESRB Organisational Chart. 
78   Council Regulation (EU) No 1096/2010 of 17 November 2010 conferring specific tasks upon the European Central 

Bank concerning the functioning of the European Systemic Risk Board (OJ L 331, 15.12.2010, p. 162). 

ESRB Annual Report 2016 
Section 3 – Ensuring implementation and accountability 

58 

 
                                                           
Annex – Publications on the ESRB’s website from 
1 April 2016 to 31 March 2017 

Warnings 

28/11/2016 
Warning ESRB/2016/07 on medium-term vulnerabilities in the residential real estate sector of 
Denmark 

28/11/2016 
Warning ESRB/2016/06 on medium-term vulnerabilities in the residential real estate sector of 
Belgium 

28/11/2016 
Warning ESRB/2016/05 on medium-term vulnerabilities in the residential real estate sector of 
Austria 

28/11/2016 
Warning ESRB/2016/08 on medium-term vulnerabilities in the residential real estate sector of 
Finland 

28/11/2016 
Warning ESRB/2016/09 on medium-term vulnerabilities in the residential real estate sector of 
Luxembourg 

28/11/2016 
Warning ESRB/2016/10 on medium-term vulnerabilities in the residential real estate sector of the 
Netherlands 

28/11/2016 
Warning ESRB/2016/11 on medium-term vulnerabilities in the residential real estate sector of 
Sweden 

28/11/2016 
Warning ESRB/2016/12 on medium-term vulnerabilities in the residential real estate sector of the 
United Kingdom 

Recommendations and Compliance Reports 

01/03/2017 
ESRB/2012/2 on funding of credit institutions: Follow-up – Summary Compliance Report 

09/02/2017 
ESRB Recommendation on intermediate objectives and instruments of macro-prudential policy 
(ESRB/2013/1): Follow-up – Summary Compliance Report 

28/11/2016 
Recommendation of 31 October 2016 on closing real estate data gaps (Recommendation 
ESRB/2016/14) 

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59 

08/08/2016 
Recommendation of 24 June 2016 amending Recommendation ESRB/2015/2 on the assessment 
of cross-border effects of and voluntary reciprocity for macroprudential policy measures 
(ESRB/2016/4) 

22/04/2016 
Recommendation of 24 March 2016 amending Recommendation ESRB/2015/2 on the assessment 
of cross-border effects of and voluntary reciprocity for macroprudential policy measures 
(ESRB/2016/3) 

Commentaries and Occasional Papers 

06/12/2016 
Macroprudential Commentaries, No 8: “Implementation of the countercyclical capital buffer regime 
in the European Union” 

22/09/2016 
Occasional Paper No 11: “Shedding light on dark markets: First insights from the new EU-wide 
OTC derivatives dataset”, by Jorge Abad, Iñaki Aldasoro, Christoph Aymanns, Marco D’Errico, 
Linda Fache Rousová et al. 

27/07/2016 
Occasional Paper No 10: “Assessing shadow banking – non-bank financial intermediation in 
Europe”, by Laurent Grillet-Aubert, Jean-Baptiste Haquin, Clive Jackson, Neill Killeen and Christian 
Weistroffer 

ESRB Reports 

16/02/2017 
The macroprudential use of margins and haircuts 

28/11/2016 
Macroprudential policy issues arising from low interest rates and structural changes in the EU 
financial system 

28/11/2016 
Vulnerabilities in the EU residential real estate sector 

06/10/2016 
Preliminary investigation into the potential impact of a leverage ratio requirement on market liquidity 

06/10/2016 
Market liquidity and market-making 

27/07/2016 
EU Shadow Banking Monitor 

13/05/2016 
A Review of Macroprudential Policy in the EU in 2015 

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Working Papers 

15/03/2017 
Working Paper No 40: “Mapping the interconnectedness between EU banks and shadow banking 
entities”, by Jorge Abad, Marco D’Errico, Neill Killeen, Vera Luz, Tuomas Peltonen, Richard Portes, 
Teresa Urbano 

14/03/2017 
Working Paper No 39: “Decomposing financial (in)stability in emerging economies”, by Etienne 
Lepers, Antonio Sánchez Serrano 

10/03/2017 
Working Paper No 38: “Flight to liquidity and systemic bank runs”, by Roberto Robatto 

10/03/2017 
Working Paper No 37: “SRISK: a conditional capital shortfall measure of systemic risk”, by Christian 
Brownlees, Robert Engle 

13/02/2017 
Working Paper No 36: “Credit conditions, macroprudential policy and house prices”, by Robert 
Kelly, Fergal McCann, Conor O’Toole 

13/02/2017 
Working Paper No 35: “Addressing the safety trilemma: a safe sovereign asset for the Eurozone”, 
by Ad van Riet 

13/02/2017 
Working Paper No 34: “Resolution of international banks: can smaller countries cope?”, by Dirk 
Schoenmaker 

22/12/2016 
Working Paper No 33: “How does risk flow in the credit default swap market?”, by Marco D’Errico, 
Stefano Battiston, Tuomas Peltonen, Martin Scheicher 

21/12/2016 
Working Paper No 32: “Financial contagion with spillover effects: a multiplex network approach”, by 
Gustavo Peralta, Ricardo Crisóstomo 

21/12/2016 
Working Paper No 31: “The (unintended?) consequences of the largest liquidity injection ever”, by 
Matteo Crosignani, Miguel Faria-e-Castro, Luís Fonseca 

17/11/2016 
Working Paper No 30: “Exposure to international crises: trade vs. financial contagion”, by Everett 
Grant 

14/11/2016 
Working Paper No 29: “Predicting vulnerabilities in the EU banking sector: the role of global and 
domestic factors”, by Markus Behn, Carsten Detken, Tuomas Peltonen and Willem Schudel 

20/10/2016 
Working Paper No 28: “Financial intermediation, resource allocation, and macroeconomic 
interdependence”, by Galip Kemal Ozhan 

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61 

20/10/2016 
Working Paper No 27: “(Pro?)-cyclicality of collateral haircuts and systemic illiquidity”, by Florian 
Glaser and Sven Panz 

20/10/2016 
Working Paper No 26: “Using elasticities to derive optimal bankruptcy exemptions”, by Eduardo 
Dávila 

19/09/2016 
Working Paper No 25: “Macroeconomic effects of secondary market trading”, by Daniel Neuhann 

19/09/2016 
Working Paper No 24: “Macroprudential policy with liquidity panics”, by Daniel Garcia-Macia and 
Alonso Villacorta 

19/09/2016 
Working Paper No 23: “Liquidity transformation in asset management: Evidence from the cash 
holdings of mutual funds”, by Sergey Chernenko and Adi Sunderam 

19/09/2016 
Working Paper No 22: “Arbitraging the Basel securitization framework: Evidence from German ABS 
investment”, by Matthias Efing 

19/09/2016 
Working Paper No 21: “ESBies: Safety in the tranches”, by Markus K. Brunnermeier, Sam 
Langfield, Marco Pagano, Ricardo Reis, Stijn Van Nieuwerburgh and Dimitri Vayanos 

08/08/2016 
Working Paper No 20: “Multiplex interbank networks and systemic importance – An application to 
European data”, by Iñaki Aldasoro and Iván Alves 

25/07/2016 
Working Paper No 19: “Strategic complementarity in banks’ funding liquidity choices and financial 
stability”, by André Silva 

13/07/2016 
Working Paper No 18: “Cyclical investment behavior across financial institutions”, by Yannick 
Timmer  

12/07/2016 
Working Paper No 17: “Assessing the costs and benefits of capital-based macroprudential policy”, 
by Markus Behn, Marco Gross and Tuomas Peltonen 

28/06/2016 
Working Paper No 16: “Bank recapitalizations and lending: A little is not enough”, by Timotej Homar 

28/06/2016 
Working Paper No 15: “Credit default swap spreads and systemic financial risk”, by Stefano Giglio 

28/06/2016 
Working Paper No 14: “Catering to investors through product complexity”, by Claire Célérier and 
Boris Vallée 

09/06/2016 
Working Paper No 13: “Banks’ exposure to interest rate risk and the transmission of monetary 
policy”, by Matthieu Gomez, Augustin Landier, David Sraer and David Thesmar 

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62 

03/06/2016 
Working Paper No 12: “Extreme risk interdependence”, by Arnold Polanski and Evarist Stoja 

02/05/2016 
Working Paper No 11: “Bank exposures and sovereign stress transmission”, by Carlo Altavilla, 
Marco Pagano and Saverio Simonelli 

02/05/2016 
Working Paper No 10: “Systemic risk in clearing houses: Evidence from the European repo 
market”, by Charles Boissel, François Derrien, Evren Örs and David Thesmar 

02/05/2016 
Working Paper No 9: “Regime-dependent sovereign risk pricing during the euro crisis”, by 
Anne-Laure Delatte, Julien Fouquau and Richard Portes 

20/04/2016 
Working Paper No 8: “Double bank runs and liquidity risk management”, by Filippo Ippolito, 
José-Luis Peydró, Andrea Polo and Enrico Sette 

12/04/2016 
Working Paper No 7: “Bail-in expectations for European banks: Actions speak louder than words”, 
by Alexander Schäfer, Isabel Schnabel and Beatrice Weder di Mauro 

Other ESRB publications 

30/03/2017 
ESRB Risk Dashboard, March 2017 (Issue 19) 

06/03/2017 
ESRB Secretariat staff response to the EIOPA Discussion Paper on the potential harmonisation of 
recovery and resolution frameworks for insurers 

03/02/2017 
Adverse scenario for the ESMA EU-wide central counterparty stress test in 2017 

22/12/2016 
ESRB Risk Dashboard, December 2016 (Issue 18) 

24/10/2016 
ESRB response to the European Commission’s Consultation Document on the Review of the EU 
Macro-prudential Policy Framework 

04/10/2016 
ESRB opinion to ESMA on securities financing transactions and leverage under Article 29 of the 
SFTR 

29/09/2016 
ESRB Risk Dashboard, September 2016 (Issue 17) 

05/09/2016 
ESRB response to the ESMA Consultation Paper on the clearing obligation for financial 
counterparties with a limited volume of activity 

19/07/2016 
Macroprudential policy beyond banking: an ESRB strategy paper 

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63 

30/06/2016 
ESRB Risk Dashboard, June 2016 (Issue 16) 

24/05/2016 
Adverse scenario for 2016 EIOPA EU-wide insurance corporation stress tests 

13/05/2016 
Letter from Mario Draghi, Chair of the ESRB, to Olivier Guersent, Director General of FISMA at the 
European Commission, on the possible use of Article 459 of the Capital Requirements Regulation 

11/05/2016 
Adverse scenario for ESMA EU-wide central counterparty stress tests in 2016 

02/05/2016 
Handbook on the assessment of compliance with ESRB recommendations 

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64 

Imprint 

© European Systemic Risk Board, 2017 

Postal address 
Telephone 
Website 

60640 Frankfurt am Main, Germany 
+49 69 1344 0 
www.esrb.europa.eu  

All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the 
source is acknowledged. 

The cut-off date for the data included in this report was 31 March 2017. 

ISSN 
ISBN 
DOI 
EU catalogue No 

1977-5083 (online) 
978-92-95210-11-0 (online) 
10.2849/999706 (online) 
DT-AA-17-001-EN-N (online)