Annual report 2020.
Date: 2021-08-11
Institutions: European Systemic Risk Board
Subjects: EU Member State, EU office or agency, European Union, activity report, coronavirus disease, economic consequence, financial control, financial stability, risk management

Annual Report 

2020 

 
 
 
 
 
 
 
 
 
Contents 

Foreword 

Executive summary 

1 

2 

Overview of the main systemic risks in the European Union 

Box 1  Advisory Scientific Committee Insight on preparing for the post-pandemic rise in 

corporate insolvencies 

Box 2  Lower for longer – macroprudential policy issues arising from low interest rates 

ESRB response to the COVID-19 pandemic 

3 

5 

8 

13 

13 

17 

2.1 

Implications for the financial system of guarantee schemes and other fiscal measures 
17 

to protect the real economy 

Box 3  ESRB Recommendation on monitoring the financial stability implications of debt 
moratoria, and public guarantee schemes and other measures of a fiscal nature 

taken to protect the real economy in response to the COVID-19 pandemic 

(ESRB/2020/8) 

2.2  Market illiquidity and implications for asset managers and insurers 

18 

21 

2.3 

Impact of large-scale downgrades of corporate bonds on markets and entities across 
22 

the financial system 

2.4 

System-wide restraints on dividend payments, share buybacks and other pay-outs 23 

Box 4  Recommendation ESRB/2020/7 on restriction of distributions during the COVID-19 

pandemic 

2.5 

Liquidity risks arising from margin calls 

Box 5  ESRB Recommendation on liquidity risks arising from margin calls 

3 

ESRB contributions to the policy framework 

3.1 

3.2 

3.3 

Banking 

Beyond banking 

Stress testing 

Box 6  ASC Insights on reforming bank stress testing in the EU: reflections in light of the 

EBA’s discussion paper on the issue 

3.4 

Cross-cutting issues 

4 

Institutional framework: implementation and accountability 

ESRB Annual Report 2020 
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26 

27 

28 

28 

32 

36 

37 

37 

40 

1 

 
 
4.1 

4.2 

Assessment of compliance with ESRB recommendations 

Reporting to the European Parliament and other institutional aspects 

Annex 1: Publications on the ESRB’s website from 1 April 2020 to 31 March 2021 

Imprint 

ESRB Annual Report 2020 
Contents 

40 

46 

48 

51 

2 

 
 
Foreword 

I am very pleased to present the tenth Annual Report of the 

European Systemic Risk Board (ESRB), covering the period between 

1 April 2020 and 31 March 2021. The ESRB Annual Report is an 

important part of the ESRB’s communication framework, which aims 

to ensure transparency and accountability towards co-legislators in 

the European Union and towards the European public at large. 

The year 2020 was defined by the coronavirus (COVID-19) 

pandemic, which – beyond its shocking death toll – devastated 

economies across the globe and destroyed the livelihoods of many 

people. The financial system entered this crisis more resilient than it 

was prior to the global financial crisis. But losses in the real economy 

can translate into increasing fragilities in the financial system. Any such fragilities were liable to 

impair the functioning of the financial sector at a time when channelling liquidity to the economy 

was crucially important. 

Against this background, the ESRB moved into “crisis mode” during April and May 2020, with policy 

meetings taking place virtually and at increasing frequency. Thereafter, it maintained its policy 

focus and took measures designed to prevent and mitigate the effects of the pandemic on financial 

stability. 

Priority areas included (i) the implications for the financial system of loan guarantee schemes and 

other fiscal measures aimed at protecting the real economy; (ii) market illiquidity and its 

consequences for asset managers and insurers; (iii) the impact of procyclical bond downgrades on 

markets and entities; (iv) system-wide restrictions on dividend payments, share buybacks and other 

pay-outs; and (v) liquidity risks arising from margin calls. 

The Annual Report describes in detail the measures adopted and sets out the related policy work 

undertaken by the ESRB. The banking sector has been a particular point of focus, as rising credit 

risk related to the economic impact of the pandemic will only become fully visible over time. The 

ESRB’s work includes studying how to use capital buffers to ensure that banks can provide lending 

to the real economy throughout the economic cycle, as well as identifying how to build capacity – 

both in the public and private sector – to manage a possible rise in corporate insolvencies. 

As the economic and financial consequences of the pandemic continue to evolve rapidly, this year’s 

Annual Report sets out – exceptionally – the ESRB’s assessment of risks up to June 2021. The 

main risks identified are (i) a potential rise in insolvencies in the private sector resulting from the 

deep global recession; (ii) the challenging macroeconomic environment for banks, insurers and 

pension funds; (iii) sharp repricing of risks and emergence of market illiquidity; (iv) large price 

corrections in the residential and commercial real estate markets; and (v) the possible re-

emergence of sovereign financing risk. The ESRB’s risk assessment also includes threats 

originating from system-wide cyber incidents, disruption to critical financial infrastructure, and 

climate change and transition risks, all of which remain critical for longer-term financial stability. 

ESRB Annual Report 2020 
Foreword 

3 

 
 
Over the last year the ESRB also followed up on work it had started prior to the pandemic. For 

example, with a view to developing a macroprudential framework beyond the banking sector, the 

ESRB responded to the European Commission’s consultation on the review of the prudential 

framework for the insurance sector and the review of the rules governing alternative investment 

funds. The ESRB also gave its opinion on reports by the European Securities and Market Authority 

concerning different aspects of central clearing. 

During the period under review, several dear and valued colleagues left their roles and new 

appointments were made. I would like to warmly thank Richard Portes, former Chair and Vice-Chair 

of the Advisory Scientific Committee (ASC), and Thomas Schepens, former Co-Chair of the 

Analysis Working Group (AWG), for their contributions to the work of the ESRB. 

Moreover, I would like to warmly welcome Claudia Buch, Vice-President of the Deutsche 

Bundesbank, as Vice-Chair of the Advisory Technical Committee, Steven Cecchetti as ASC Vice-

Chair and Emmanuelle Assuouan as AWG Co-Chair. 

Christine Lagarde 

Chair of the ESRB 

ESRB Annual Report 2020 
Foreword 

4 

 
 
Executive summary 

The period under review, from the start of April 2020 to the end of March 2021, was dominated by 

the coronavirus (COVID-19) pandemic. The pandemic gave rise to an extreme economic shock 

affecting the global and EU economy and increasing risks to financial stability. 

Following the onset of the COVID-19 pandemic, EU bodies, national governments, central banks, 

and supervisory and resolution authorities took unprecedented action to support the economy. In its 

initial response, the ESRB General Board identified and took measures in five priority areas: the 

implications for the financial system of guarantee schemes and other fiscal measures to protect the 

real economy; market illiquidity and its implications for asset managers and insurers; the impact of 

large-scale downgrades of bonds on markets and entities across the financial system; system-wide 

restraints on dividend payments, share buybacks and other pay-outs; and liquidity risks arising from 

margin calls. In the course of 2020, the ESRB supplemented its initial response to the crisis by 

examining whether there might be measures that would help banks finance the recovery. This work 

covered the use and availability of capital buffers and the macroprudential toolkit more broadly; the 

working of corporate insolvency procedures; the functioning of the bank recovery and resolution 

framework; and dealing with non-performing loans, including via transferring risks to other parts of 

the private sector where they can be absorbed better. 

The ESRB has been regularly reassessing the risks to financial stability caused by the COVID-19 

pandemic and the risk assessment described in this report therefore includes developments up until 

June 2021. It classified the risk of widespread defaults in the real economy as a severe systemic 

risk to financial stability in the EU (Risk 1); the risk originating from the difficult macroeconomic 

environment for banks, insurers and pension schemes as a severe risk to financial stability (Risk 2); 

the risk stemming from the re-emergence of sovereign financing risk and debt sustainability 

concerns as elevated (Risk 3); and the risk originating from instability and pockets of illiquidity in 

financial markets as elevated (Risk 4). Moreover, the ESRB deemed operational risks, such as 

those that might originate from a system-wide cyber incident, as elevated (Risk 5), while it 

concluded that systemic risks linked to finance-driven disruptions in critical financial infrastructures 

(Risk 6) and risks linked to climate change (Risk 7) should be monitored. To improve the monitoring 

of risks, in particular interconnectedness across the financial sector, the ESRB issued a 
Recommendation on the use of a legal entity identifier.1 

The ESRB contributed to ensuring the resilience of the banking sector, notably in light of the 

expected impact of the COVID-19 crisis. On the priority topic of assessing the financial stability 

implications of public guarantee schemes and other fiscal measures, the ESRB sent a letter to the 

Economic and Financial Affairs Council encouraging cooperation and information exchange 
between national fiscal and macroprudential authorities,2 as well as a subsequent 

Recommendation introducing minimum requirements for national monitoring and establishing a 

1   Recommendation of the European Systemic Risk Board of 24 September 2020 on identifying legal entities 

(ESRB/2020/12). 

2   Letter to the Members of the ECOFIN regarding the implications of protecting the real economy. 

ESRB Annual Report 2020 
Executive summary 

5 

 
 
 
framework for reporting to the ESRB.3 Based on this monitoring, the ESRB published a report on 
the financial stability implications of COVID-19 support measures in February 2021.4 Another key 

initiative to keep the financial system resilient was the ESRB Recommendation on restricting 
distributions.5 The Recommendation covered credit institutions as well as investment firms, 

(re)insurers, and central counterparties, and was extended in amended form in December 2020. 

The ESRB continued to contribute to the coordination of macroprudential policy in the Union in the 

banking sector. In this respect, it issued an Opinion on a Belgian macroprudential measure based 

on Article 458 of the Capital Requirements Regulation (CRR), extending the period of application of 
their existing stricter measure targeting risk weights for residential real estate exposures.6 The 

ESRB also issued an Opinion on a French macroprudential measure based on Article 458 of the 

CRR, extending the period of application of their existing stricter requirements for large exposures 

with regard to highly indebted large non-financial corporations. Another ESRB Opinion covered the 

extension of a Swedish stricter macroprudential measure under Article 458 of the CRR setting a 

risk weight floor for residential real estate exposures. The ESRB also issued a Recommendation on 
a Norwegian macroprudential measure setting a systemic risk buffer.7 In addition, the ESRB 

recommended that a national measure not covered by the CRR or the Capital Requirements 

Directive (CRD) in Luxembourg, and the above-mentioned systemic risk buffer and Article 458 CRR 

measures for the residential and commercial real estate sectors in Norway, be reciprocated. More 

generally, the ESRB continued to monitor macroprudential measures adopted in the Union and to 

facilitate an exchange of views among its members on such measures. 

Besides the measures taken in response to the COVID-19 pandemic, the ESRB continued to work 

on developing the macroprudential toolkit beyond the banking sector. In particular, the ESRB 

provided input to the European Securities and Markets Authority (ESMA) on a number of topics 

concerning central clearing, ways to enhance the macroprudential aspects of the Solvency II rules 
for insurers, and ways to enhance the Alternative Investment Fund Managers Directive (AIFMD)8. 

Regarding central clearing, the ESRB collaborated with ESMA on central clearing solutions for 

pension scheme arrangements, post trade risk reduction services with regards to the clearing 

obligation, and standards on reporting, data quality, data access and registration of trade 

repositories under European Market Infrastructure Regulation (EMIR Refit). The ESRB also 

provided an opinion to ESMA on the classification and subsequent recognition of third country 

central counterparties providing services in the European Union. Regarding the insurance sector, 

the ESRB submitted its response to the European Commission consultation on the review of 

3   Recommendation of the European Systemic Risk Board of 27 May 2020 on monitoring the financial stability 

implications of debt moratoria, public guarantee schemes and other measures of a fiscal nature taken to protect 
the real economy in response to the COVID-19 pandemic (ESRB/2020/8). 

4   ESRB report on the financial stability implications of COVID-19 support measures to protect the real economy. 
5   Recommendation of the European Systemic Risk Board of 27 May 2020 on restriction of distributions during the 

COVID-19 pandemic (ESRB/2020/7).  

6   Opinion of the European Systemic Risk Board of 18 February 2021 regarding Belgian notification of an extension 
of the period of application of a stricter national 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 and investment firms 
(ESRB/2021/1). 

7   Recommendation of the European Systemic Risk Board of 4 December 2020 regarding Norwegian notification of 

its intention to set a systemic risk buffer rate in accordance with Article 133 of Directive (EU) 2013/36/EU 
(ESRB/2020/14) and accompanying report. 

8   Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund 
Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 
1095/2010 (OJ L 174, 1.7.2011, p. 1). 

ESRB Annual Report 2020 
Executive summary 

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Solvency II. It included proposals for macroprudential tools covering capital, liquidity and cross-

sectoral aspects set out in a report published in February 2020. It also stressed the need to 

continue ensuring that risks are properly captured under Solvency II and to establish a harmonised 

recovery and resolution framework across the European Union. Regarding investment funds, the 

ESRB submitted its response to the European Commission consultation on the review of the 

AIFMD. The response considered the suitability of the reporting framework and access to data for 

monitoring systemic risk, the need to operationalise existing macroprudential policy instruments, 

and the ongoing development of the macroprudential policy framework for investment funds. 

The ESRB also provided adverse scenarios for the stress tests of the European Supervisory 

Authorities. Concerning the banking sector, the European Banking Authority (EBA) postponed until 

2021 the stress test it had planned for 2020, for which the ESRB had already provided an adverse 

macrofinancial scenario in 2020. To reflect its most recent risk assessment, the ESRB provided a 

new scenario to the EBA in January 2021. Concerning the insurance sector, the ESRB provided an 

adverse scenario for the European Insurance and Occupational Pensions Authority 2021 EU-wide 

insurance sector stress test. Concerning money market funds, the ESRB provided ESMA with a 

recalibrated set of risk factors to ensure that the scenario would be more severe than any 

movement in the markets during March 2020, covering all risk factors. 

As part of the ESRB’s accountability and reporting obligations, the Chair of the ESRB attended 

hearings before the Committee on Economic and Monetary Affairs of the European Parliament. At 

these hearings, the Chair provided Members of the European Parliament with first-hand information 

on the rationale for policy initiatives that had been adopted by the ESRB. This included the 

measures taken by the ESRB in response to the COVID-19 pandemic. 

As in previous years, the ESRB organised a number of events to engage stakeholders in 

discussions on macroprudential policy. In view of the COVID-19 pandemic, these events, as well as 

the ESRB's regular meetings, took place virtually, using videoconferencing technology. As part of 

its mandate, the ESRB held its annual meeting with the Committee of European Audit Oversight 

Bodies and statutory auditors of EU-based global systemically important banks and insurers (G-

SIFIs). The meeting, which is designed to inform the ESRB of sectoral developments or any 

significant developments at G-SIFIs, focused on the immediate and long-term impact of the COVID-

19 pandemic on banks and insurers, on how the audit work may be affected by the pandemic, and 

on the role of auditors in the prevention of fraud in accounting. In view of the COVID-19 pandemic 

the ESRB did not hold its Annual Conference. 

ESRB Annual Report 2020 
Executive summary 

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Overview of the main systemic risks in the 

1 
European Union 

The COVID-19 pandemic caused an unprecedented global public health crisis and a deep 
economic recession. The swift and massive support measures in the areas of monetary, fiscal 
and prudential policies helped contain the COVID-19 crisis, most notably by preserving favourable 

financing conditions, stabilising household income and providing liquidity support to the corporate 

sector. Nonetheless, economic activity contracted sharply in the second quarter of 2020. The 

economic impact of the pandemic has been highly uneven on account of the pronounced 

dispersion of value-added growth across sectors of economic activity and across Member States. 

The easing of lockdown measures towards the end of the second quarter facilitated a strong 

rebound in economic activity in the third quarter. The decline in real GDP in 2020 amounted to 

6.9% in the euro area and 6.2% in the EU, largely driven by steep drops in private consumption (on 

the back of surging forced and precautionary savings) as well as investment. 

While the rollout of vaccinations created an anchor for medium-term expectations, new 
waves of COVID-19 infections weighed on the economic recovery. The rebound in global 
demand and additional fiscal measures supported economic activity. But the second and third 

waves of COVID-19 infections and the concomitant tightening of containment measures weighed 

on economic activity in the fourth quarter of 2020 and the first quarter of 2021. While activity in the 

manufacturing sector has held up well, services activity – particularly in contact-intensive sectors –

has been severely curbed, albeit to a somewhat lesser extent than in the spring of 2020. Short-term 

uncertainty has remained high on account of delays in the rollout of vaccinations and concerns 

about the effectiveness of vaccines with respect to COVID-19 virus mutations. To bridge the gap 

until the uncertainty recedes and the economic recovery is firmly entrenched, policies to support 

favourable financing conditions and an expansionary fiscal stance remain essential. 

Significant uncertainty also prevails over the medium term, as the scope of permanent 
structural changes in supply and demand patterns remains unclear. These structural changes 
can be expected to have pronounced (positive and negative) effects for the cash flow and 

profitability of individual sectors and could possibly deepen existing economic divergences between 

Member States on account of the different country-specific composition of value added. Such 

structural changes may also have an impact on financial stability, as sectors that are temporarily 

but severely affected as well as sectors suffering from permanent scarring are subject to rising 

solvency pressures and corporate insolvencies. This could be exacerbated through cliff effects 

caused by a premature withdrawal of public support measures, notably in countries where concerns 

about limited fiscal space and high sovereign debt may constrain further fiscal support. 

The main source of systemic risk in the EU originates from the impact of the pandemic on 

economic activity, which may give rise to increasing solvency pressures in the private 
sector and their feedback effects on the financial system. So far, swift and broad-based policy 
support measures have helped mitigate the decline in the cash flow of the corporate sector. But 

government support programmes are becoming more targeted and will be gradually phased out, 

not least depending on the perceived fiscal space in individual Member States. However, the longer 

the crisis lasts, the more pronounced the deterioration in non-financial corporation (NFC) balance 

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Overview of the main systemic risks in the European Union 

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sheets will be. More companies will exhaust the scope for short-term cost-saving measures and 

deplete their cash buffers to compensate for the drop-in cash flow. At the same time, the NFC 

sector will be increasingly confronted with a rising debt burden – the dark side of the far-reaching 

reliance on large-scale liquidity-support measures in 2020. Research based on firm-level data 

suggests that the number of firms in distress could significantly increase. The dominance of liquidity 

support during the early phases of the crisis was reflected in a 6.7% nominal increase in the 

outstanding stock of loans of euro area monetary financial institutions to the NFC sector between 

end-2019 and end-2020. This increase was particularly pronounced in EU countries with elevated 

pre-crisis NFC sector debt levels, thereby compounding cross-country heterogeneity. On 

aggregate, a large part of the additional NFC sector borrowing in the second quarter of 2020 was 

used to increase cash buffers, implying that net debt in this quarter remained broadly stable. 

However, there was significant heterogeneity across various sub-sectors and countries, reflecting 

the highly asymmetric impact of the COVID-19 crisis, with net debt increasing substantially for the 

most affected sub-sectors. Moreover, companies in countries with elevated corporate debt levels 

experienced the largest loss in gross operating surpluses, reflecting the differentiated magnitude 

and sectoral composition of the economic shock. The success of the efforts to contain solvency 

pressures in the non-financial corporate sector will also determine the magnitude of the spill-over 

effects to the financial sector. 

Banks in the EU have been relatively resilient during the COVID-19 crisis so far. Banks 
entered the pandemic in much better shape than at the start of the previous crisis. Importantly, they 

were able to continue lending to the real economy during the COVID-19 crisis and to accommodate 

the surge in loan demand in the second and third quarters of 2020, in part driven by public loan 

guarantees. As a result, lending to firms and households continued to grow in 2020, although 

lending activity slowed down in the second half of 2020. 

However, many banks are facing a combination of rising asset-quality concerns, ongoing 

pressures on profitability, persistent structural problems and, in some countries, 
persistently high levels of legacy non-performing loans (NPLs). While NPL ratios have not yet 
risen, the volume of IFRS 9 stage 2 loans and restructured loans has started to increase, 

particularly for loans under moratoria and other public support schemes. Deteriorating asset quality 

and increasing provisioning needs would have an impact on the capital position of banks, which are 

already suffering from structural weaknesses, including low profitability. Most notably, the 

pronounced dispersion of provisioning practices across European banks could point to under-

provisioning in some segments of the banking sector. 

To address these imminent challenges, banks need to recognise and provision for new 
NPLs early on and enhance their internal NPL management and resolution capacity. 
Recognising losses at an early stage will be key for banks’ balance sheet transparency. 

Recognising losses only when moratoria and guaranteed loan programmes expire would 

compound the risk of cliff effects, which could trigger an abrupt deleveraging process. It will be 

crucial to avoid repeating the errors made during previous crises, when NPLs accumulated for 

years on the balance sheets of European banks and constituted a significant drag on credit 

expansion and, concomitantly, economic growth. 

Banks should avail themselves of all NPL resolution options. These include debt restructuring, 
the sale of NPLs and debt-for-equity swaps. For many banks this implies the need to significantly 

ESRB Annual Report 2020 
Overview of the main systemic risks in the European Union 

9 

 
 
enhance their organisational capacity for pursuing the most efficient NPL resolution policies. This is 

crucial, as a lengthy NPL resolution process can push viable but overindebted companies into the 

“gone concern” category, thereby creating additional welfare losses. 

Efforts to prepare for a rise in NPLs also need to encompass measures outside the micro- 
and macroprudential domains. In particular, there is a need to reform insolvency and foreclosure 
frameworks and strengthen the capacity of the judiciary to avoid bottlenecks. Moreover, having 

deep and efficient secondary markets for NPLs would help accelerate the resolution process 

through sales of NPLs. The ESRB General Board, therefore, welcomed the Communication on 
NPLs released by the European Commission in December 2020.9  

There is scope for improving the targeting of public support measures. Improved targeting of 
public support measures could increase their efficiency by avoiding support to (i) firms that are able 

to survive without support; and (ii) unviable firms that are eventually bound to fail even with public 

support. Looking forward, public support measures will need to shift from a defence of the pre-

pandemic status quo to more targeted solutions that help viable companies to adjust to the post-

pandemic world. Phasing out across-the-board measures is particularly warranted, when these 

delay the recognition of loan losses. 

Policies to address the debt burden of viable but over-indebted firms became more 
important. The extraordinary public support measures adopted during the crisis were more 
effective in addressing liquidity shortfalls than in closing solvency gaps. EU governments have, 

therefore, started to complement liquidity support with solvency support measures, including 

through the injection of equity and quasi-equity into viable firms to contain the negative economic 

impact of rising private sector debt levels. Given that small and medium-sized enterprises (SMEs) 

have been harder hit by the crisis than larger companies, and that bank financing remains by far 

the dominant form of financing for SMEs, an increase in equity through the restructuring of debt on 

bank balance sheets may need to play a key role. A complementary avenue could consist of a 

(partial and targeted) conversion of public loan guarantees into equity under the strict condition of 

appropriate burden-sharing arrangements with other creditors. However, such an approach might 

require the need for governments to increase their capacity to monitor and assess the financial 

situation of corporates to avoid providing debt relief to unviable companies. 

Furthermore, Member States should review and improve collateral enforcement procedures 
and strengthen the capacity of the judiciary to avoid bottlenecks. Reforms of foreclosure 
procedures could reduce the length of procedures, facilitate the transfer of collateral to creditors 

and accelerate the sale and valuation of collateral. Moreover, a reform of corporate insolvency and 

debt recovery legislation could facilitate the convergence of insolvency frameworks across the EU. 

A swift adoption of the proposed EU Directive on credit servicers, credit purchasers and the 
recovery of collateral10 would facilitate extrajudicial collateral enforcement to reduce the cost of 

NPL resolution and remove obstacles for NPL sales to specialised credit purchasers. In addition, 

preventive restructuring frameworks could help companies with viable business models to repair 

their balance sheets. Developing preventive restructuring frameworks in accordance with the EU 

9   Tackling non-performing loans in the aftermath of the COVID-19 pandemic, Communication from the Commission to the 

European Parliament, the Council and the European Central Bank, 16 December 2020. 

10   Proposal for the EU Directive on credit servicers, credit purchasers and the recovery of collateral.  

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Restructuring and Insolvency Directive of 2019 ahead of the transposition deadline could help avoid 

lengthy and costly court procedures and reduce a potential backlog in the insolvency courts. 

The negative impact of a possible further increase in provisions on bank capital also 

compounds the need to step up efforts to boost operational efficiency, including through 
consolidation. Well-designed consolidation can help address the issue of overcapacity in retail 
banking by streamlining overlapping distribution networks. 

Housing markets have proven resilient to the COVID-19 crisis, but vulnerabilities related to 
residential real estate have further increased. In 2020 house prices continued to rise, further 
compounding overvaluation risks that already prevailed in several Member States prior to the crisis. 

In some countries the increased overvaluation coincides with persistently high household 

indebtedness, which adds to the vulnerability of household balance sheets – especially if combined 

with high debt service-to-income ratios. The resilience of the residential real estate market has 

been supported by several factors, including the mitigating impact of public support measures on 

real disposable household incomes and the continuation of extremely favourable financing 

conditions. 

Compared with the rather resilient residential real estate market, the commercial real estate 
market was severely affected by the COVID-19 crisis. Transactions in the commercial real 
estate market dropped by about 50% year-on-year in the last three quarters of 2020 on the back of 

falling demand from both domestic and international investors, with the drop in foreign demand 

more pronounced. Office and retail property prices were most severely affected, albeit with large 

cross-country variations. The retail real estate sector may be more severely hit by long-term 

behavioural change relating to a permanent increase in the market share of e-commerce. 

Moreover, while a significant number of staff will return to their offices as the pandemic recedes, 

remote working arrangements can be expected to play a much bigger role in the future. This could 

result in a “K-shaped” recovery, with higher quality properties which can be adapted to stricter 

health requirements being less affected. Towards the end of 2020, the price indices were affected 

by positive vaccine news, with the sectors most affected by the pandemic (i.e. retail and office) 

seeing the largest gains. 

The market turmoil at the onset of the COVID-19 pandemic was a reminder of the risk of 
instability and pockets of illiquidity in financial markets. The outbreak of the COVID-19 
pandemic led to an increase in investor risk aversion and triggered a broad-based repricing of risk 

and an increased demand for safe and liquid assets. The sharp fall in equity and bond prices at the 

beginning of the pandemic contributed to draining liquidity from other markets (“dash for cash”), 

thereby creating severe liquidity stress in some market segments. This was compounded by margin 

calls on derivative transactions, with ramifications for other markets. The combination of investor 

redemptions and deteriorating market liquidity of the assets held by investment funds created 

liquidity management challenges for some types of money market funds and corporate bond funds. 

The pandemic-related turmoil in financial markets in March 2020 was followed by a 
remarkable rebound in asset prices. Following the market turmoil in March 2020 financial 
conditions eased on the back of swift and broad-based monetary and fiscal policy measures. 

Better-than-previously-forecast macroeconomic data, the increased credibility of policy support – 

including on account of the political agreement on the Next Generation EU (NGEU) package on 21 

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July 2020 – and the start of COVID-19 vaccinations have significantly improved investor sentiment. 

These factors have been reflected in a narrowing of credit spreads and rising equity market 

valuations. In the EU sovereign bond market yields have gradually declined, notwithstanding a 

perceptible increase in public debt-to-GDP ratios. At the same time, credit spreads in corporate 

bond markets have narrowed from their peak reached during the market turmoil in March 2020 and 

approached pre-pandemic levels across the rating spectrum. Following the rebound, corporate 

bond spreads have been well below the levels observed during the global financial crisis and the 

euro area sovereign debt crisis and appear to be tight in view of corporate earnings projections and 

the credit rating outlook, particularly in the high-yield segment of the corporate bond market. 

Non-bank financial intermediaries have increased their risk-taking. The low interest rate 
environment continues to strengthen incentives for investors to increase their exposure to riskier 

assets to generate higher return. As inflows into euro area investment funds recovered in the 

course of 2020, non-bank financial intermediaries increased their exposures to lower-rated NFC 

debt, while also extending the duration of their NFC debt portfolios. This has raised their 

vulnerability to outflows, notably as valuation changes are passed to investors, who may reassess 

the credit risk of NFCs. While corporate bond funds temporarily increased their cash holdings 

following the market turmoil in March 2020, cash positions have subsequently declined to pre-crisis 

levels. The investment fund sector has increased its exposure to less liquid assets; thereby 

increasing the vulnerability to sizeable outflows should severe market tensions re-emerge. 

The risk of a possibly abrupt correction in asset prices has increased amid rising concerns 
about an overvaluation of asset prices in some market segments. There is a risk that asset 
valuations, at least in some market segments, may not fully reflect the increase in corporate 

vulnerabilities in some sectors since the onset of the crisis, most notably rising leverage, falling 

profitability and impaired debt-servicing capacity. Moreover, besides reflecting improved 

macroeconomic prospects, the continued rise in prices of risky assets also reflects the search for 

yield in the “lower for longer” environment (Box 2) as well as expectations of continued 

extraordinary policy support.  

Financial stability risks may also emanate from spillovers from rising long-term sovereign 
bond yields in the United States to Europe. The rapid recovery of the US economy, in part 
supported by its large fiscal stimulus package, led to an increase in inflation expectations, resulting 

in an upward shift in long-term sovereign bond yields. This served as a reminder of the sensitivity of 

asset pricing to shifts in expectations about the future course of monetary and fiscal policies in the 

United States. The risk of such shifts could be compounded by uncertainty about the Federal 

Reserve System’s reaction function following the recent monetary policy regime change. Spillover 

effects from a further rise in long-term US sovereign bond yields could weigh on EU economic 

activity if the steepening of the yield curve were to perceptibly precede the economic recovery in 

the EU. Rising sovereign bond yields could spill over to other asset classes, including corporate 

bonds, possibly leading to a tightening in NFC sector financing conditions. In a similar vein, while 

the spillover from the rise in US sovereign bond yields in February and March to Europe has so far 

been moderate, a perceptibly-stronger-than-currently-observed rise in European sovereign bond 

yields could have an adverse impact on debt dynamics, most notably in countries that already 

entered the COVID-19 crisis with an elevated debt burden. 

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Box 1 
Advisory Scientific Committee Insight on preparing for the post-pandemic 
rise in corporate insolvencies 

An Advisory Scientific Committee (ASC) Insight11 authored by Bo Becker and Martin Oehmke 
entitled "Preparing for the post-pandemic rise in corporate insolvencies" was published in January 

2021. It provides an economic perspective on the trade-offs involved in dealing with a potential 

post-pandemic rise in corporate insolvencies. The authors argued that the main challenge in 

dealing with post-pandemic corporate insolvencies will be to distinguish between viable firms and 

those which, owing to structural changes in their economic environment, have become non-viable. 

Targeting of intervention measures is therefore essential. For viable firms, policy should aim to 

facilitate debt restructuring, relying on formal or informal insolvency procedures. For non-viable 

firms, policy should seek to facilitate the reallocation of resources to more productive uses. 

The ASC Insight also noted a number of issues specific to the COVID-19 shock: (i) while small 

firms have been particularly affected by the COVID-19 shock, formal insolvency procedures often 

do not deal efficiently with small firms, in particular when it comes to restructuring; (ii) policymakers 

should be mindful of congestion in formal and informal insolvency procedures and policies should 

aim to increase institutional capacity; and (iii) given the dominant role of banks in financing the 

European NFC sector, the restructuring of NFC debt on bank balance sheets will be key for 

supporting viable but overindebted companies; this could possibly be supported by addressing 

regulatory and accounting disincentives to restructuring. 

Box 2 
Lower for longer – macroprudential policy issues arising from low interest 
rates 

The macrofinancial environment continues to feature very low or negative nominal interest rates; 

this low interest rate environment (LIRE) and the structural changes induced by it can generate 

risks which may endanger financial stability and require macroprudential action and mitigation. 

Looking ahead, the forces underpinning the LIRE are consistent with a scenario where interest 

rates and inflation remain low for a long time. Since the 1980s, changes in the structure and 

functioning of the real side of the economy have reduced both the natural (or neutral) equilibrium 
real rate of interest R* and the risk premium component of nominal interest rates..12 After the global 

financial crisis (GFC), regulatory changes and more risk-averse positioning by financial institutions 

further boosted the demand for safe assets, further compressing term premia and lowering inflation 

expectations and real and nominal interest rates. The “secular stagnation” hypothesis 

11   ASC Insights are written by one or more members of the ASC and briefly present topics of macroprudential relevance for 

the ESRB General Board. 

12   During the “Great Moderation”, financial factors such as the deregulation of the financial and credit markets, excessively 
expansionary monetary policies and overly optimistic expectations about future macroeconomic and financial prospects 
may have favoured an excessive increase in the supply of funds, a compression of risk premia and a reduction of real and 
nominal interest rates. 

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encompasses many of the demand and supply factors that led to structural imbalances between 

the demand for investment and the supply of saving at a global level and consequently to lower 
global equilibrium real rates.13 A "financial cycle” view of the developments following the GFC 
balance sheet recession may be consistent with the "lower for longer" scenario.14 

Furthermore, research suggests that the COVID-19 shock may strengthen the downward trend of 

nominal and real interest rates and increase the probability and persistence of a low for long 

scenario, transforming it into an “even lower for even longer” one. It is still difficult to predict the 

overall effects of the COVID-19 shock on the macroeconomy and interest rates. However, most 

analyses that use very long time-series to trace back to episodes similar to those of the COVID-19 

pandemic, or model the economic interactions driven by the pandemic shock and policy responses 

in a more structured way, conclude that the COVID-19 shock has added further downward pressure 
on market real interest rates and the natural real rate of interest.15 

Over the years following the financial crisis some regulatory reforms have attempted to increase the 
resilience of financial institutions;16 the protracted duration of this environment has continued 

nonetheless to put a strain on financial institutions and generate risks that may endanger financial 

stability. Risks related to the sustainability of sectoral business models have increased since 2016 

for banks, insurers and pension funds, remaining generally high. Against the background of the 

LIRE, broad-based risk-taking has intensified between 2016 and 2021 in the banking and 

investment fund sectors and continues to pose high risks to financial stability across all financial 

sectors (banks, ICPFs, investment funds, financial markets). Looking ahead, as a consequence of 

the LIRE and the pandemic, we can expect a further significant increase in indebtedness in certain 

segments of the household, NFC and government sectors, which could cause difficulties in the 

event of a shock to risk premia. Structural changes in the financial system may also present risks in 

the LIRE; a more market-based financial system provides benefits through diversified sources of 

funding of the economy, but can also bring higher interconnectedness, higher sensitivity to market 

risks and higher vulnerability to liquidity shocks. 

The analysis identified four main areas of concern that may require macroprudential action 

mitigating the risks arising in the LIRE. These four areas are: profitability and resilience of banks; 

indebtedness and viability of borrowers; systemic liquidity risk; and sustainability of the business 

models of insurers and pension funds offering longer-term return guarantees. 

The LIRE has aggravated existing structural problems in the EU banking sector, such as 

overcapacity and cost inefficiencies. The identification of unviable banks and the timely 

management of viability issues, through intervention or orderly exit, is therefore of primary 

13   Factors behind the fall in R* include: (i) demographic developments, such as the increase in life expectancy and the decline 
in population growth; (ii) the falling (relative) price of investment goods; (iii) the slower pace of technological innovation; (iv) 
the increase in wealth and income inequality; (v) rising savings rates in developing countries and the consequent increase 
in demand for assets issued by advanced economies; (vi) the evolution of the consumption/wealth ratio. 

14   The “financial cycle” view would normally expect interest rates to go back to “normal” levels once balance sheet restrictions 

are resolved. 

15   See Jordà et al. (2020), Holston et al. (2017), Holston et al. (2020), Leduc and Liu (2020), and Kozlowski et al. (2020). 

16   Basel III and IFRS 9 were implemented after the GFC to raise the capabilities of the banking sector to withstand adverse 
shocks, while the Bank Recovery and Resolution Directive and the establishment of the Single Resolution Board were 
aimed at facilitating an orderly exit from the banking sector. A successful transposition of EIOPA’s Opinion on the 2020 
Review of Solvency II into legislation would reduce the risks to the insurance sector posed by the LIRE. For pension funds, 
the implementation of the IORP II Directive and a transfer of risk to customers reduces the risks posed by the LIRE. Finally, 
for investment funds, strengthened monitoring and stress-testing guidelines have been implemented since the GFC. 

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importance given the central role of the banking system in the EU economy. In this regard, the 

ESRB would propose: removing existing barriers to the efficient functioning of the market and 

reconsidering the framework for dealing with distressed banks; removing potential obstacles to 

banking sector consolidation; reconsidering incentives for banks’ digital transformation and 

improvement of cost efficiency; reconsidering legal restrictions on the application of negative 

interest rates to deposits. 

The level of indebtedness across the real economy and financial system has risen considerably 

against the background of the LIRE and is expected to increase further because of the COVID-19 

shock. To address the risks stemming from this excessive indebtedness, the ESRB proposes: 

building up a strong credit and debt monitoring capacity to target the most dangerous levels and 

trends of indebtedness and monitor vulnerability to shocks; introducing borrower-based measures 

targeted at households; introducing measures for ensuring the financial viability of corporates and 

enabling policies to be targeted towards restructuring viable businesses and conducting efficient 

insolvency procedures. 

The LIRE and the LIRE-induced structural changes have made the financial system more sensitive 

to market shocks and systemic liquidity risks through three broad channels of transmission: 

endogenous build-up of risk, liquidity illusion and interconnectedness within the financial system. 

The systemic liquidity tensions experienced by financial intermediaries during the March 2020 

turmoil seem to confirm this. In this area, the ESRB proposes: improving liquidity reporting and 

encouraging a more efficient use of already available data; implementing system-wide liquidity 

stress tests; and moving towards macroprudential liquidity requirements. Moreover, to the extent 

that structural change involves a move of traditional banking activities and related risks to non-bank 

financial intermediation, the LIRE requires the development of macroprudential policy beyond 

banking and more activity-based regulation; the lack of these instruments leaves in fact the 

macroprudential toolkit ill-equipped to deal directly with risks related to structural changes in the 

financial system. 

The protracted LIRE has weakened the resilience of insurers and occupational pension funds 
offering longer-term guarantees.17 For both these two sectors, if asset prices were to fall abruptly, 
the higher net present value of liabilities given low interest rates would coincide with a fall in the 

value of assets, i.e. with a “double hit” scenario. In this regard, the ESRB would invite relevant 
stakeholders to consider the measures proposed in ESRB (2016)18 and would welcome the 
adoption of EIOPA’s Opinion in the context of the review of Solvency II.19 For occupational pension 

funds, the forthcoming review of the IORP II Directive should take into account the issues raised by 

the ESRB on the sustainability of pension funds in a LIRE. 

Some existing macroprudential tools have been used to address financial stability risks in the LIRE. 

While the LIRE is mostly associated with structural risk factors, it can also amplify cyclical 

developments. So far no EU Member State has explicitly introduced macroprudential instruments 

17   The protracted LIRE presents significant risks for insurers, because of their high stocks of liabilities providing a guaranteed 
return, particularly in the life insurance business. For pension funds, the most significant risk posed by the LIRE stems from 
defined benefit liabilities. 

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

ESRB, 2016. 

19   Opinion on the 2020 review of Solvency II, EIOPA, December 2020. 

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(i.e. countercyclical capital buffers (CCyBs), systemic risk buffers (SyRBs), sectoral systemic risk 

buffers (SSyRBs), or borrower-based measures (BBMs)) to specifically address systemic risks 

related to the LIRE; however, several macroprudential authorities in the EU have addressed 

cyclical risks using CCyBs, considering these risks as arising from cyclical forces potentially 

amplified by the LIRE. With a view to complementing the use of CCyBs, macroprudential authorities 

should consider implementing either system-wide or targeted capital buffers (i.e. SyRBs and 

SSyRBs) to counter the build-up of non-synchronised imbalances in specific market segments that 

can contribute to increasing systemic risk in the banking sector. Finally, the LIRE may require 

adjustments to the design and calibration of BBMs to reflect the debt-servicing capacity of 

households and account for the expected increase in household indebtedness, while considering 

BBMs’ implications for households’ market access and their impact on inequality. 

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ESRB response to the COVID-19 

2 
pandemic 

The initial impact of the COVID-19 pandemic on the financial system was predominantly on the 

financial markets, with large falls in asset prices and stresses in some markets observed in March 

2020 (see Section 1). Accordingly, many of the measures the ESRB took to prevent and mitigate 

the effects of the COVID-19 pandemic on financial stability in the Union concerned market-based 

finance and the non-bank financial sector. The measures were taken in the areas of market 

illiquidity and its implications for asset managers and insurers; the impact of large-scale 

downgrades of bonds on markets and entities across the financial system; and liquidity risks arising 

from margin calls. Regarding the banking sector, the ESRB’s initial response was designed to help 

avert a credit crunch. Measures covered the implications for the financial system of guarantee 

schemes and other fiscal measures to protect the real economy as well as system-wide restraints 

on dividend payments, share buybacks and other pay-outs. In the course of 2020, the ESRB 

supplemented its initial response to the crisis with an examination of whether there might be 

measures that would help banks finance the recovery. This work covered the use and availability of 

capital buffers and the macroprudential toolkit more broadly; the working of corporate insolvency 

procedures; the functioning of the recovery and resolution framework; and dealing with NPLs, 

including by transferring risk to other parts of the private sector where they can be absorbed better. 

This section describes these measures in more detail.  

2.1 
schemes and other fiscal measures to protect the real economy 

Implications for the financial system of guarantee 

To support the real economy during the COVID-19 pandemic, governments have provided 
swift and unprecedented support packages. Fiscal measures such as public guarantees on 
loans and direct grants have helped contain the impact of the pandemic and prevent a loss of 

viable businesses. Loan moratoria schemes have provided liquidity support during the crisis. 

Monetary policy measures have secured favourable financing conditions. Together with supervisory 

measures, these policies have been supporting the real economy. Given the high degree of 

integration of Member States’ economies, these national measures can also have significant 

implications for EU-wide financial stability, in particular positive or negative spillovers and cross-

border and cross-sectoral implications. Securing financial stability therefore requires close 

monitoring and cooperation between national macroprudential authorities and national fiscal and 

supervisory authorities. Against this background, the ESRB considers it important to put in place a 

comprehensive mechanism for monitoring the EU-wide financial stability implications of the fiscal 

measures taken by national authorities to protect the real economy in response to the COVID-19 

pandemic. 

In April 2020 a work stream under the auspices of the Steering Committee was created to 

develop work on this topic and ensure that relevant information could be gathered and 
shared among the authorities. On 14 May 2020 the ESRB addressed a letter to the national fiscal 
authorities of the European Union, encouraging closer dialogue from an early stage between the 

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relevant authorities at the national level.20 On 27 May the ESRB issued Recommendation 
ESRB/2020/8.21 It recommends that national macroprudential authorities: (A) monitor the design 

features and uptake of COVID-19 related measures and their implications for financial stability, and 

(B) report these design features and the uptake of measures to the ESRB (see Box 3 below). The 

data gathered under Recommendation B encompass all fiscal measures relevant to financial 

stability, providing the most complete picture possible of the size, uptake and design features of 
fiscal measures taken by ESRB member countries.22 

Box 3 
ESRB Recommendation on monitoring the financial stability implications of 
debt moratoria, and public guarantee schemes and other measures of a 
fiscal nature taken to protect the real economy in response to the COVID-19 
pandemic (ESRB/2020/8) 

Recommendation ESRB/2020/8 recommends that national macroprudential authorities monitor 

COVID-19 related measures and their implications for financial stability, as well as report on their 
design features and uptake to the ESRB. Such monitoring requires close cooperation between 

national macroprudential, fiscal and supervisory authorities. The Recommendation is composed of 

two sub-recommendations: 

Recommendation A – National monitoring of financial stability implications of 
measures taken to protect the real economy in response to the COVID-19 
pandemic 

National macroprudential authorities are recommended to monitor and assess the financial stability 

implications of COVID-19 related measures taken by their Member States to protect the real 

economy, such as debt moratoria, and public guarantee schemes and other measures of a fiscal 

nature. For this purpose, it is recommended that national macroprudential authorities monitor the 

design features and uptake of these measures, as well as their possible implications for financial 

stability using key indicators, such as the following. 

(a) Design features and uptake of measures: in particular the volume of the measures; types of 

financial support (such as debt moratoria, loan guarantees, subsidised loans, or equity 

participations); beneficiaries and eligibility conditions; duration; and information on the use of the 

measure (e.g. volume and number of applications received and accepted). 

(b) Implications for financial stability: in particular the flow of credit to the real economy; the liquidity, 

solvency and indebtedness of the non-financial sector; and the financial soundness of the financial 

20   ESRB letter to Governments on the financial stability impact of the national guarantee schemes and other fiscal 

measures. 

21   Recommendation of the European Systemic Risk Board of 27 May 2020 on monitoring the financial stability 

implications of debt moratoria, public guarantee schemes and other measures of a fiscal nature taken to protect 
the real economy in response to the COVID-19 pandemic (ESRB/2020/8). 

22   Recommendation (B) requires three reporting templates to be submitted to the ESRB, with the first submission due by 31 

July 2020 and the others submitted quarterly. These three templates cover the fiscal measures’ features (template 1), their 
uptake (template 2) and include a qualitative questionnaire (template 3). While the first two templates gather information on 
the fiscal measures taken, the third collects information on the main qualitative concerns of the authorities regarding the 
implications of the measures. Data from template 1 is also published on the ESRB’s website: Policy measures in 
response to the COVID-19 pandemic. 

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institutions, including observed and expected trends in NPLs and the ability to meet liquidity and 

capital requirements. 

Recommendation B – Reporting by national macroprudential authorities to the 
ESRB 

National macroprudential authorities are recommended to regularly report to the ESRB the 

information necessary for the ESRB to monitor and assess the implications of the national 

measures referred to in Recommendation A for financial stability in the Union. This should include 

information necessary to monitor and assess the cross-border and cross-sectoral implications of 

the measures, as made available to national macroprudential authorities through existing reporting 

arrangements with financial institutions and any additional information made available by fiscal 

authorities and other government agencies engaged in the delivery of the measures. 

On 15 December 2020 the ESRB General Board approved a Report on the financial stability 
implications of COVID-19 support measures to protect the real economy.23 Released in 
February 2021, the report summarises the work developed by a working group established in June 

2020 under the auspices of the General Board. It shows that the fiscal response designed to 

support the real economy has stabilised lending and that the financial system has continued to 

function. The report also identifies priorities for future policy in terms of the design and duration of 

the fiscal measures, enhanced transparency and reporting, and preparedness for potential adverse 

scenarios. The key findings of the report are set out below. 

i) The financial system has continued to provide funding to the real economy and losses in 
banking books have been contained. Yet the pandemic has intensified risks and vulnerabilities in 
the real economy. In its initial phase, the sectors and households most affected by the pandemic 

were under severe liquidity stress. However, prompt action taken by governments has provided 

crucial relief. The fiscal measures have indirectly protected the financial sector from the impact of 

the pandemic and ensured the continued provision of financial services: up to 35% of new bank 

lending to corporates during the pandemic has been subject to those measures. Fiscal measures 

have thus helped to prevent the loss of viable businesses, and moratoria schemes have provided 

liquidity support. In addition, monetary policy has played a supportive role. Furthermore, regulators 

have used the existing regulatory flexibility and relaxed bank balance sheet constraints. 

ii) Differences in fiscal measures reflect, to a large extent, differences in the exposure of 
countries to the pandemic. For example, countries hit harder by the pandemic tend to have larger 
programmes with greater uptake, while countries with a higher share of employment in vulnerable 

sectors rely more on direct grants than on public guarantees. The uptake of moratoria is positively 

correlated with the pre-crisis debt levels of NFCs and households. However, the observed 

heterogeneity also reflects differences in fiscal space and a potential lack of policy coordination. 

iii) The longer the crisis lasts and the weaker the economic recovery, the greater the risk 
that losses in the non-financial sector could spill over into the financial sector. While there is 
a high degree of uncertainty, an adverse scenario can’t be ruled out. There could be adverse 

feedback loops to the real economy if banks were to deleverage to meet capital requirements 

23   ESRB report on the financial stability implications of COVID-19 support measures to protect the real economy. 

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imposed by regulators or markets. Cross-border banking activities could be particularly severely 

affected by any deleveraging. Eventually, corporate insolvencies might increase and banks could 

face higher losses. Timely action is therefore required to address evolving vulnerabilities and to 

increase balance sheet transparency. If banks’ balance sheets were to remain impaired for an 

extended period after the crisis, economic recovery and financial stability would be at stake. 

Drawing on these key findings, the ESRB has identified several domains which require 

attention from policymakers, in particular in the areas of policy design and coordination, 

debt monitoring, balance sheet transparency, and preparedness. 

Avoiding cliff effects. In timing the withdrawal of public support, there needs to be a balance 
between the risk of short-term cliff effects, which could arise if measures are withdrawn too early 

and at the same time, and unintended longer-term distortions to necessary structural changes in 

some economic sectors. The scale of potential future solvency problems depends on how the 

pandemic evolves, how robustly the different sectors perform and how appropriate policy 

responses are. 

Targeting fiscal measures. Over time, fiscal measures will have to be applied in a more targeted 
way. It will be particularly important to balance liquidity versus solvency measures. In addition, 

authorities and governments need to promote policies that enhance sustainable economic growth. 

Monitoring private debt sustainability. Elevated debt levels for households and firms might 
become unsustainable if the economic crisis lasts longer than expected and the income and 

profitability of borrowers cannot keep pace with the debt burden. This could in turn lead to a 

significant accumulation of losses in the financial sector.  

Preparing for a scenario with increased distress in the corporate sector. It is important that 
the institutions responsible for administering restructuring and insolvency procedures do not reach 

capacity constraints and that they do everything they can to avoid value destruction. Addressing the 

issue of NPLs as early and decisively as possible is essential to ensuring that the financial system 

is strong and stable and supports sustainable growth.  

Enhancing financial institutions’ balance sheet transparency and upgrade reporting. 
Continued access to credit might have a stabilising effect in the short term, but extending loans to 

unviable firms may come at the expense of structural change, which would be delayed, and may 

entail a more painful adjustment over the longer term. Timely and prudent recognition of credit risk 

is necessary to increase the transparency of banks’ balance sheets. 

Coordinating policies across policy areas and countries. Addressing potential solvency issues 
will require policy responses that are coordinated across several policy areas, including insolvency 

legislation, labour and social policies, and competition policy. 

The ESRB continued to monitor the financial stability implications of COVID-19 related 
measures during the first quarter of 2021. The work focused on the potential risks to financial 
stability that could arise from insufficient reflection of macroeconomic risks, including the risk of a 

significant increase in corporate defaults and in banks’ risk assessments and from a premature 

withdrawal of fiscal support. In order to better monitor these risks, the reporting framework under 

Recommendation ESRB/2020/8 was revised. It now also collects information on how the national 

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authorities plan to address solvency pressures in the corporate sector, e.g. by adjusting support 

measures or encouraging early debt restructuring processes. 

2.2 
and insurers 

Market illiquidity and implications for asset managers 

The sharp fall in asset prices observed at the onset of the coronavirus pandemic was 

accompanied by large redemptions from some investment funds and a deterioration in 
financial market liquidity. Market conditions had stabilised following actions taken by central 
banks, supervisory authorities and governments in the EU and globally. This helped alleviate the 

risk of further redemption pressures, in particular given the high level of uncertainty regarding the 

macroeconomic outlook. 

Against that background, the ESRB General Board adopted a Recommendation to ESMA to 
coordinate a supervisory exercise with investment funds.24 The exercise had the objective of 
assessing the state of preparedness of certain segments of the investment fund sector to 

redemption pressures, further declines in market liquidity or increased valuation uncertainty, while 

also considering steps that could improve that preparedness. The scope of the exercise covered 

investment funds with large exposures to corporate debt and investment funds with large 

exposures to real estate, which the ESRB deemed particularly vulnerable given their liquidity 

profile. The Recommendation and ESMA's response are described in more detail in the ESRB's 

Macroprudential Review. 

The ESRB also highlighted that liquidity management tools available to fund managers can 
help to mitigate “first-mover advantage” dynamics and the risk of asset fire sales. Individual 
fund managers often have a range of tools at their disposal to use in such situations, although the 
availability of such tools has not yet been harmonised at EU level.25 These tools include, for 

example, swing pricing and redemption gates. Some fund managers employed these tools in the 

light of the deterioration in market liquidity and rising redemption requests observed at the onset of 

the coronavirus shock. In addition to helping to protect investors, the timely use of liquidity 

management tools also reduces the risk of forced sales of less liquid assets in periods of stress, 

helping to guard against the adverse system-wide effects stemming from fire sale dynamics across 
the financial system. To this end, the ESRB General Board emphasised in a public statement26 that 

it is important that liquidity management tools are used in a timely manner, especially by funds that 

invest in less liquid assets or assets that become temporarily illiquid and have short redemption 

periods. 

The ESRB also stressed that the monitoring of liquidity risks in the insurance sector needs 
to be improved. EIOPA and national insurance supervisors had considered developing a liquidity 
monitoring framework for (re)insurers in response to the COVID-19 pandemic. In a communication 

24   Recommendation of the European Systemic Risk Board of 6 May 2020 on liquidity risks in investment funds 

(ESRB/2020/4). 

25   See Section 3.2.2, “Enhancing the Alternative Investment Fund Managers Directive”. 

26   Use of liquidity management tools by investment funds with exposures to less liquid assets, ESRB, May 2020. 

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to EIOPA27, the ESRB strongly encouraged EIOPA and its members to finalise and operationalise 
that framework promptly. Beyond the need to address risks and vulnerabilities stemming from the 

COVID-19 pandemic, the ESRB reiterated that the Solvency II review provides an opportunity to 

better enable supervisors to address liquidity risk in the insurance sector, including by enhancing 

Pillar 2 provisions so that supervisors can require individual (re)insurers with a vulnerable liquidity 

profile to hold a liquidity buffer. 

2.3 
on markets and entities across the financial system 

Impact of large-scale downgrades of corporate bonds 

The economic disruptions caused by the coronavirus pandemic posed the risk of a wave of 
credit rating downgrades in the corporate bonds sector. Credit rating downgrades of BBB-
rated bonds or entities to the high yield universe can create cliff effects – which may become 
problematic as BBB-rated bonds represent more than half of the investment grade universe28 – and 

trigger sales. For example, index-tracking funds would need to sell those issuers’ bonds quickly if 

they were removed from the reference basket. Other investment funds, banks, pension funds and 

insurers may decide, or be forced, to sell – for example because of their risk limits, because of their 

investment mandates, or to protect their solvency positions as they would do when facing credit 

quality deterioration in their portfolios. Such sales could result in large spread increases, given the 

limited absorption capacity of the high yield market, leading to mark-to-market losses for investors 

and higher funding costs for corporates. These issues are discussed in a note that the ESRB 
published in May 2020.29 

The ESRB General Board coordinated a top-down scenario analysis to assess the impact of 
large-scale corporate bond downgrades across all parts of the financial sector. The ESRB 
saw a need to better understand the effects of credit rating downgrades such that they would not 

cause systemic risk by impairing the functioning of financial markets. The exercise coordinated by 

the ESRB was conducted in cooperation with the European Supervisory Authorities and the 

European Central Bank and covered banks, investment funds, insurers, pension funds and financial 

markets. It focused on a sensitivity analysis to evaluate the possible repercussions of large-scale 

corporate bond downgrades and potential fire sale impacts under a range of hypothetical scenarios 

and assumptions. The results of this analysis show that in a severe downgrade scenario with a 

corresponding yield shock, EU financial institutions would suffer €150-200 billion market losses 

stemming from repricing effects (when considering bonds issued by financial and non-financial 

corporations). Losses due to assets sold at distressed values in the context of very low market 

liquidity might add another 20-30% to this, while additional second-round effects leading to further 
losses cannot be excluded.30 

27   Liquidity risks in the insurance sector, ESRB, June 2020. 
28   This figure corresponds to the calculations made in the Issues note on liquidity in the corporate bond and commercial 
paper markets, the procyclical impact of downgrades and implications for asset managers and insurers. It covers 
the euro area countries, plus Bulgaria, the Czech Republic, Denmark and Romania as at Q4 2019. 

29  

Issues note on liquidity in the corporate bond and commercial paper markets, the procyclical impact of 
downgrades and implications for asset managers and insurers. 

30   A system-wide scenario analysis of large-scale corporate bond downgrades, ESRB technical note, July 2020. 

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The ESRB proposed that ESMA and the European Commission take two actions in the 
medium term to mitigate risks related to large-scale rating downgrades.31 The proposed 
actions focus in particular on the two risk transmission channels identified by the ESRB: the 

potential for procyclical behaviour from index-tracking funds and asset management on the one 

hand, and from insurers, banks and pension funds on the other. First, it should be assessed 

whether more systematic monitoring and reporting of contractual references to ratings in 

investment mandates and fund prospectuses would be feasible in order to provide supervisors with 

a clearer picture of where systemic issues may arise. Second, the transparency of credit rating 

agencies' (CRAs) methodologies should be assessed in light of the COVID-19 pandemic 

experience, and with a view to exploring the possibility of setting minimum requirements for the 

validation of CRAs' methodologies. These two actions should support the broader goal of analysing 

how to foster countercyclicality in the implementation of EU law. 

2.4 
buybacks and other pay-outs 

System-wide restraints on dividend payments, share 

Since the outbreak of the COVID-19 pandemic, authorities worldwide have taken forward-

looking measures to ensure the resilience of the financial sector, strengthening its capacity 

to lend to the real economy in stressed conditions and reducing the risk of financial 
institutions failing. System-wide restraints on distributions (dividend payments, share buybacks 
and other pay-outs) aim at preserving capital within the system, increasing its loss-absorbing 

capacity and maintaining stable lending levels. These policies have complemented a wide array of 

actions undertaken to stabilise the economy, including government fiscal packages to support non-

financial firms (see Section 2.1.) and temporary capital and operational relief, allowing banks to 

operate temporarily below the level of capital defined by the Pillar 2 Guidance (P2G), the capital 

conservation buffer and the liquidity coverage ratio. Furthermore, they complement the release of 

cyclical and structural capital buffers. 

A number of European and national authorities took action to encourage financial 

institutions under their remit to refrain from voluntary pay-outs (e.g. dividends, bonuses and 
share buybacks aimed at remunerating shareholders). At Union level, on 17 March 2020 
EIOPA issued a statement urging (re)insurers to take measures to preserve their capital position in 

balance with the protection of the insured by following prudent dividend and other distribution 
policies, including variable remuneration.32 As regards the banking sector, on 27 March 2020 ECB 
Banking Supervision issued a recommendation33 that, at least until 1 October 202034, no dividends 

should be paid out and no irrevocable commitment to pay out dividends should be undertaken by 

credit institutions for the financial years 2019 and 2020, and that credit institutions should refrain 

from share buybacks aimed at remunerating shareholders. This recommendation was addressed to 

31   ESRB letter to the European Commission and ESMA on the Procyclical impact of downgrades of corporate bonds on 

markets and entities across the financial system, October 2020. 

32   EIOPA Statement. 
33   Recommendation of the European Central Bank of 27 March 2020 on dividend distributions during the COVID-19 

pandemic and repealing Recommendation ECB/2020/1 (ECB/2020/19).  

34   The ECB amended Recommendation ECB/2020/19 on 27 July 2020 (ECB/2020/35), extending the pay-out restrictions until 

January 2021, and clarified the timeline for restoring buffers in a press release dated 28 July 2020. 

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significant institutions directly supervised by the ECB and to national competent authorities (NCAs) 

with regard to less significant institutions. The recommendation was followed by an EBA statement 

on 31 March 2020 urging banks “to refrain from dividend distribution or share buybacks which result 
in a capital distribution outside the banking system, in order to maintain its robust capitalisation”35. 
In support of the previous initiatives of the ECB, EBA, EIOPA and national authorities (see next 

paragraph) and to strengthen the case for a uniform approach across the Union and across 

different segments of the financial sector, the ESRB issued a Recommendation (See Box 1) on 27 

May 2020 asking the relevant authorities to request the financial institutions under their supervisory 

remit to refrain, at least until 1 January 2021, from making dividend distributions or irrevocable 

commitments to make dividend distributions, from buying back ordinary shares and from creating 

obligations to pay variable remuneration to material risk-takers. 

Several national authorities notified the ESRB of the actions they have taken to strengthen 
the financial sector. In response to the ESRB Recommendation of 27 May, in the course of the 
second and third quarters of 2020 all the relevant national authorities urged banks, investment 

firms, (re)insurance companies and central clearing counterparties (CCPs), either in a legally 

binding or non-binding way, to withhold distributions, to refrain from buying back ordinary shares 

and to apply prudent and sustainable remuneration policies and practices until 1 January 2021. The 

measures were activated through regulatory announcements addressed to all institutions under 

their remit, or via individual correspondence with specific financial institutions. 

The ESRB is currently in the process of assessing compliance with Recommendation 
ESRB/2020/7 and aims to publish its findings in the course of 2021. In addition, the ESRB 
Secretariat regularly monitored the effectiveness of the measures taken by the relevant authorities 

in response to its Recommendation. The majority of credit institutions refrained from committing to 

new dividend pay-outs, which resulted in a very limited amount of distributions in the banking sector 
during 2020.36 With regards to the non-banking sector, insurance and reinsurance companies, as 

well as CCPs, showed a lower level of constraint in comparison with the banking sector, albeit in an 

overall context of high levels of constraint. 

Owing to the ongoing COVID-19 crisis, the European authorities decided to extend the 

measures in place or to issue new regulatory announcements to cover distributions planned 
for 2021. On 15 December 2020 ECB Banking Supervision recommended that significant 
supervised entities and groups that intended to proceed with some limited pay-outs not make 

distributions or share buybacks amounting to more than 15% of their accumulated profits for the 

financial years 2019 and 2020, or more than 20 basis points in terms of the Common Equity Tier 1 
ratio, whichever was lower.37 On the same date, the ESRB amended its Recommendation (see Box 
4) asking the relevant authorities to request financial institutions to refrain from making any 

distributions unless they applied extreme caution and did not exceed the conservative threshold set 

35   EBA Statement. 
36   Please note that the ESRB has gathered information on the effectiveness of the measures by conducting surveys among 

its member institutions. The information provided in this section is only partial and provisional, since official information was 
not available as at the cut-off date for drafting this section (February 2021). 

37   Recommendation of the European Central Bank of 15 December 2020 on dividend distributions during the COVID-

19 pandemic and repealing Recommendation ECB/2020/35 (ECB/2020/62). 

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by their competent authority. The EBA issued two statements38 calling on banks to continue 
applying conservative distribution policies and to carefully consider the resulting impact of dividends 

or other distribution on the capital trajectory. As regards the insurance sector, on 18 December 

2020 EIOPA stated that any dividend distributions, share buybacks or variable remunerations 

should not exceed “thresholds of prudency” and that institutions should ensure that the resulting 

reduction in the quantity or quality of their own funds remains at levels appropriate to the current 
levels of risk.39 

Having been extended, the system-wide restrictions remain largely effective. Few banks have 
informed the relevant authorities of an intention to disregard their requests for restraint on 

distributions, at least during the first and second quarters of 2021. Most competent authorities 

engaged in supervisory dialogue with individual institutions to assess their intention to proceed with 

distributions within the thresholds they had been set by those authorities. As regards the insurance 

sector, the vast majority of NCAs have been informed about the intention of reinsurers (life and 

non-life) to proceed with some limited pay-outs (especially in December 2020 and February 2021 

for the accounting year 2019). 

Box 4 
Recommendation ESRB/2020/7 on restriction of distributions during the 
COVID-19 pandemic 

The ESRB has fully supported the initiatives of its member institutions and has considered 

it necessary to issue a recommendation to ensure that financial institutions across the 
financial sector that may pose a risk to financial stability maintain high levels of capital. 
Recommendation ESRB/2020/7 on restriction of distributions during the COVID-19 pandemic40 

asked the relevant authorities to request the financial institutions under their supervisory remit to 

refrain, at least until 1 January 2021, from taking any actions which could reduce the quantity or 

quality of their own funds at the EU group level (or at the individual level where the financial 

institution is not part of an EU group), and, where appropriate, at the sub-consolidated or individual 

level. Those include dividend distributions or irrevocable commitments to make dividend 

distributions, buybacks of ordinary shares and creating obligations to pay variable remuneration to 

material risk-takers. The Recommendation covers credit institutions, investment firms subject to the 

CRD, insurers, reinsurers and central counterparties and takes into account the critical role these 

sectors of the financial system play for the real economy, in particular during times of crisis. 

Recommendation ESRB/2020/7 was originally designed to cover the period until 1 January 

2021, but the resurgence of COVID-19 infections prior to that date raised uncertainty and 
short-term risks to recovery from the crisis. Markets and authorities lacked information on the 
long-term impact of the crisis on the financial sector and credit markets. Notwithstanding the 

continuation of unprecedented policy measures, many businesses were confronted with impaired 

cash flows, weak earnings and rising indebtedness. Given this context, the ESRB concluded that 

38   EBA Statement on actions to mitigate the impact of COVID-19 on the EU banking sector, 12 March 2020, and EBA 
Statement calling on banks to apply a conservative approach on dividends and other distributions in light of the 
COVID-19 pandemic, 15 December 2020. 

39   EIOPA Statement. 
40   Recommendation of the European Systemic Risk Board of 27 May 2020 on restriction of distributions during the 

COVID-19 pandemic (ESRB/2020/7). 

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an exceptional extension of pay-out restrictions to account for uncertainty about future 

macroeconomic development would serve this objective by allowing financial institutions to 

maintain a sufficiently high level of capital to mitigate systemic risk and contribute to the economic 

recovery. 

Therefore, on 15 December 2020 the ESRB General Board adopted Recommendation 
ESRB/2020/15 amending Recommendation ESRB/2020/7.41 According to the revised 
Recommendation, relevant authorities are recommended to request banks, investment firms and 

(re)insurers (but no longer CCPs) to refrain, until 30 September 2021, from making distributions 

which have the effect of reducing the quantity or quality of their own funds, unless these financial 

institutions apply extreme caution in carrying out distributions and the resulting reduction does not 

exceed the conservative threshold set by their competent authority. The revised Recommendation 

is in line with the decisions taken in parallel by the EBA, EIOPA and ECB Banking Supervision and 

aims to ensure that financial institutions maintain a sufficiently high level of capital to mitigate 

systemic risk and contribute to economic recovery in the event of further economic disruptions. 

At the same time, Recommendation ESRB/2020/15 recognises the importance of 
distributions in enabling financial institutions to raise capital externally. Given that the 
prospect of available COVID-19 vaccines has reduced the probability of more severe scenarios, the 

revised Recommendation allows some limited distribution under specific circumstances. Financial 

institutions may proceed with distributions provided that (i) they engage in discussion with their 

competent authority, (ii) they apply extreme caution so that they do not put the stability of the 

financial system and the recovery process at risk and (iii) the resulting reduction does not exceed 

the conservative threshold set by their competent authority. The competent authorities are asked to 

calibrate the conservative threshold paying due regard to: the need for financial institutions to 

maintain a sufficiently high level of capital, also taking into account the risks of a deterioration in the 

solvency position of corporations and households in view of the pandemic; the need to ensure that 

the overall level of distributions of financial institutions under their supervisory remit is significantly 

lower than in the recent years prior to the COVID-19 crisis; the specificities of each sector within 

their remit. The Recommendation also includes forward guidance which stresses the temporary 

nature of these restrictions and the commitment of the General Board to decide, before the expiry 

of the Recommendation, if the Recommendation should be amended, considering, inter alia, 

macroeconomic developments and the latest available information. 

2.5 

Liquidity risks arising from margin calls 

The ESRB issued a Recommendation on liquidity risks arising from margin calls (ESRB 

2020/06). This Recommendation was designed to mitigate the adverse impact margin calls 
might have on both bank and non-bank entities. The ESRB had published two reports in recent 
years setting out these impacts and related policy options.42 The unprecedented magnitude of 
margin calls during the market turmoil at the onset of the COVID-19 pandemic made it necessary to 

41   Recommendation of the European Systemic Risk Board of 15 December 2020 amending recommendation 

ESRB/2020/7 on restriction of distributions during the COVID-19 pandemic (ESRB/2020/15). 

42   See the ESRB reports on margins and haircuts of January 2020 and February 2017. 

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take further action. This included assessing whether the increase in margin calls is strongly linked 

to the increase in market volatility. The Recommendation was addressed to CCP supervisors, 

clearing member and securities market supervisors as well as ESMA, and they were requested to 

report to the ESRB on how they were following up on it. The ESRB received responses on five of 

the eight recommendations where submissions were due in the course of 2020 and expects to 

complete the assessment of these recommendations in the course of 2021. The remaining 

responses are expected by the end of 2021 and 2022. 

Box 5 
ESRB Recommendation on liquidity risks arising from margin calls 

Recommendation ESRB/2020/6 addressed to the competent authorities in the area of central 

counterparties (CCPs), banks and other relevant market participants, contains four sub-

recommendations in total: 

Recommendations A and D – Limiting cliff effects in relation to the demand for 
collateral and Mitigation of procyclicality in the provision of client clearing services 
and in securities financing transactions 

Recommendations A and D are aimed at ensuring that sudden and significant (hence procyclical) 

changes and cliff effects relating to initial margins (including add-on margins) and collateral are 

limited: (i) by CCPs vis-à-vis their clearing members; (ii) by clearing members vis-à-vis their clients; 

and (iii) in the bilateral sphere, where they result from a mechanical reliance on credit ratings and 

possibly from procyclical internal credit scoring methodologies. Liquidity planning should be 

predictable and manageable to the extent possible by limiting unexpected and significant margin 

calls. Providing reasonable and enforceable notice periods for any changes in the margin and 

haircut protocols could ensure that market participants adapt in an orderly fashion. It is also 

recommended that global standards governing respective minimum requirements are developed, 

and that EU legislation gives them effect. 

Recommendation B – Stress scenario for the assessment of future liquidity needs 

This Recommendation is aimed at ensuring that CCPs capture comprehensively in their liquidity 

stress testing any events that could lead to them experiencing a liquidity shortfall, with a view to 

incentivising them to improve their management of their reliance on liquidity service providers. This 

will improve overall market resilience, given that there is a large degree of concentration and 

interconnection among CCPs and their liquidity service providers, and that prudent liquidity 

management at individual CCP level in this regard would enhance risk management from a 

systemic and macroprudential perspective. 

Recommendation C – Limiting liquidity constraints related to margin collection 

This Recommendation is aimed at ensuring that CCPs, while maintaining their financial resilience, 

limit asymmetry in the payment of variation margins collected intraday – and that they design their 

margin frameworks and schedules to be predictable and avoid excessive liquidity constraints for 

clearing members that could lead to default events. 

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ESRB contributions to the policy 

3 
framework 

3.1 

Banking 

Beyond the ESRB’s response to the COVID-19 pandemic (see Section 2), which comprised 

several measures relevant for banks, the ESRB continued its general work to contribute to 
ensuring the resilience of the EU banking sector. In particular, it opined on several national 
macroprudential measures and reciprocation requests and issued a Recommendation on a legal 

entity identifier covering legal entities engaged in financial transactions. 

3.1.1 
Regulation 

Opinions related to Article 458 of the Capital Requirements 

The French High Council for Financial Stability (Haut Conseil de stabilité financière) 

informed the ESRB on 23 April 2020 of its decision to extend for one additional year the 

period of application of the existing stricter national measure on large exposures, in 
accordance with Article 458(9) of the Capital Requirements Regulation (CRR). This measure 
imposes a large exposure limit on French globally systemically important institutions (G-SIIs) and 

other systemically important institutions (O-SIIs) (5% of their eligible capital) with regard to highly 

indebted large French NFCs, aiming to limit concentration risks. The measure has been in force 

since 1 July 2018, was due to expire at the end of June 2020. It was then extended to the end of 

June 2021. Pursuant to Article 458(4) of the CRR, the ESRB provided the Council, the European 
Commission and France with its opinion on 19 May 2020.43 It concluded that the extension of the 

period of application of the measure was justified, suitable, proportionate, effective and efficient, 

focusing on the net benefits of the national measure for maintaining financial stability. It considered 

the measure to be a helpful backstop to ensure risk diversification and safeguard the resilience of 

the French banking system. The ESRB noted that the economic crisis triggered by the COVID-19 

pandemic intensified risks in the corporate sector across the EU and globally, and was of the view 

that the extension of the measure did not contradict the overall aim of guaranteeing lending to the 

real economy throughout the crisis. The ESRB also noted that its previous recommendation to 
reciprocate the measure44 continued to apply to the measure in its extended form. The ESRB 
reiterated that in line with its assessment of the original measure45, continued follow-up should be 

undertaken by the French authorities (i) in the form of close monitoring of the measure's impact and 

the evolution of risk, and (ii) in view of exploring alternative options to address financial stability 

concerns, e.g. borrower-based measures or a sectoral systemic risk buffer. 

43   Opinion of the European Systemic Risk Board of 19 May 2020 regarding the French notification of an extension of 

the period of application of a stricter national measure (ESRB/2020/5) and accompanying report. 

44   Recommendation of the European Systemic Risk Board of 5 December 2018 amending Recommendation ESRB/2015/2 on 
the assessment of cross-border effects of and voluntary reciprocity for macroprudential policy measures (ESRB/2018/8). 

45   Opinion of the European Systemic Risk Board of 9 March 2018 regarding French notification of a stricter national measure 

based on Article 458 of the CRR (ESRB/2018/3). 

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On 16 September 2020 the Swedish Financial Supervisory Authority (Finansinspektionen) officially 

notified the ESRB in accordance with Article 458(2)(d)(vi) of the CRR of its intention to extend a 

national measure limiting risks stemming from Swedish mortgage loans. The measure consists of a 

risk weight floor of 25% for Swedish mortgage loans applied to credit institutions that use the 

internal ratings-based (IRB) approach. Pursuant to Article 458(4) of the CRR, the ESRB provided 
the Council, the European Commission and Sweden with its opinion on 14 October 2020.46 The 

assessment was made against the backdrop of signs that vulnerabilities in the Swedish residential 

real estate (RRE) market were continuing to increase and were likely to amplify in the light of the 

uncertain negative impact of the COVID-19 pandemic and the related economic downturn. The 

ESRB was of the view that the proposed extension of the measure did not contradict the overall 

aim of guaranteeing lending to the real economy throughout the economic crisis. The ESRB was 

also of the view that the alternative macroprudential instruments listed in Article 458 of the CRR, 

which must be considered before any stricter national measure can be taken, would not be 

adequate to address the risk at hand. Therefore, the ESRB was of the view that the stricter 

measure was justified, proportionate, effective and efficient for the purpose mentioned above. 

However, this assessment was made for the specific purposes of the procedure under Article 458 

of the CRR and does not prejudge the outcome of the review of the Recommendation of 27 June 

2019. Overall, the ESRB considered that the measure would not entail disproportionate adverse 

effects for the internal market or other financial systems. The economic assessment that 

accompanied the opinion also highlighted the importance of continued reciprocation of the measure 

by other Member States with credit institutions active in the Swedish residential mortgage market. 

In addition, it pointed to the importance of reassessing the situation once the high uncertainty 

around the implications of the COVID-19 pandemic have dissipated. 

On 22 January 2021 the Nationale Bank van België/Banque Nationale de Belgique 

(NBB/BNB) notified the ESRB of its intention to extend for the second time the period of 

application of its current macroprudential measure based on Article 458(2)(d)(vi) of the CRR, 
from 1 May 2021 until 30 April 2022. The measure consists of imposing a macroprudential risk 
weight add-on on all domestic credit institutions applying the IRB approach whose retail exposures 

are secured by residential immovable property for which the collateral is located in Belgium. 

Pursuant to Article 458(4) of the CRR, the ESRB provided the Council, the European Commission 
and Belgium with its opinion on 19 February 2021.47 The ESRB supported the NBB/BNB’s intention 

to extend the period of application of its current macroprudential measure increasing risk weights 

for IRB banks’ exposures to the Belgian RRE sector and considered that the extension of the 

measure was warranted to maintain the resilience of Belgian IRB banks to potentially severe 

downward corrections in the domestic RRE market. 

Luxembourg’s Systemic Risk Committee (Comité du Risque Systemique) submitted to the ESRB, 

on 18 December 2020, its reciprocation request concerning a national macroprudential measure 

46   Opinion of the European Systemic Risk Board of 14 October 2020 regarding Swedish notification of regarding 

Swedish notification of an extension of the period of application of a stricter national 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 and investment firms (ESRB/2020/13). 

47   Opinion of the European Systemic Risk Board of 18 February 2021 regarding Belgian notification of an extension 
of the period of application of a stricter national 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 and investment firms 
(ESRB/2021/1). 

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not covered by the CRR/CRD.48 As the measure is a national macroprudential measure not 
covered by the CRR/CRD, it is not subject to an ESRB Opinion and therefore no ESRB Opinion 

was issued. The measure entered into force on 1 January 2021. Pursuant to Article 5(4) of Decision 

ESRB/2015/4, the ESRB Assessment Team prepared an assessment of the need to adopt a 

recommendation on reciprocation together with a draft amendment of Recommendation 

ESRB/2015/2. The measure introduced legally binding loan-to-value (LTV) limits for new mortgage 

loans on RRE located in Luxembourg, with different LTV limits across categories of borrowers. The 

ESRB supported reciprocation in principle. As the measure is borrower-based as opposed to 

previous reciprocation requests, and as Luxembourg is a relatively small country with easier access 

for consumers resident in Luxembourg to cross-border credit than in other countries, the ESRB 

decided to propose a rather low institution-specific materiality threshold of 0.1%. As the measure is 

not covered by the CRR/CRD and is therefore not available in all Member States, the ESRB 

exceptionally proposed an additional country-specific materiality threshold of 1% in addition to the 

above-mentioned institution-specific threshold so as to reduce the administrative burden for other 

Member States who have exposures below that level. The Recommendation was approved by the 

ESRB General Board on 24 March 2021. 

3.1.2 

ESRB Recommendation on the Norwegian systemic risk buffer 

3.1.2.1  Notification of systemic risk buffer by Norwegian Ministry of 
Finance 

On 5 November 2020 the Norwegian Ministry of Finance notified the ESRB of its intention to 

adopt a systemic risk buffer of 4.5% for exposures in Norway under Article 133(11) and (14) 

of Directive 2013/36/EU49, as applied to and in Norway on 1 January 2020 pursuant to the 
terms of the Agreement on the European Economic Area50 (CRD IV). The measure provides 
for a change in the level and scope of an existing national buffer, with the application of a 4.5% 

SyRB to the domestic exposures of all credit institutions authorised in Norway, including the 

subsidiaries of institutions with parents established in other European Economic Area countries. 

The existing national buffer had not been formally notified pursuant to Article 133 of CRD IV, as the 

framework had not been made part of the European Economic Area (EEA) Agreement until 1 

January 2020. Pursuant to Article 133(14) of CRD IV read in conjunction with the EEA Agreement, 
the ESRB issued a Recommendation on 4 December 2020.51 The measure entered into force on 

31 December 2020. A transitional rule applies to those banks that do not follow the advanced IRB 

approach. The SyRB was intended to promote domestic financial stability in Norway by 

48   Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements 
for credit institutions and investment firms and amending Regulation (EU) No 648/2012, (OJ L 176, 27.6.2013, p. 1). 
49   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). 

50   As amended by Decision of the EEA Joint Committee No 79/2019 of 29 March 2019 amending Annex IX (Financial 

services) to the EEA Agreement [2019/2133] (OJ L 321, 12.12.2019, p.170). 

51   Recommendation of the European Systemic Risk Board of 4 December 2020 regarding Norwegian notification of 

its intention to set a systemic risk buffer rate in accordance with Article 133 of Directive (EU) 2013/36/EU 
(ESRB/2020/14) and accompanying report. 

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safeguarding the resilience of the financial system and by ensuring that banks continue to be 

adequately capitalised given the high level of long-term systemic risk. The ESRB was of the view 

that the level of the measure was appropriate given the identified systemic risks threatening the 

stability of the Norwegian financial system and considered the measure to be effective and 

proportionate. Based on the information provided, the ESRB concluded that the measure would not 

entail disproportionate adverse effects on the EEA as whole or on other financial systems. The 

ESRB was furthermore of the view that none of the existing measures in the CRR and CRD IV, 

excluding Articles 458 and 459 of the CRR, alone or in combination were sufficient to address the 

identified macroprudential or systemic risk in Norway, taking into account the relative effectiveness 

of those measures. 

3.1.2.2  Request for reciprocation of SyRB and risk weight measures 
under Article 458 of the CRR 

The Norwegian Ministry of Finance notified the ESRB Secretariat on 2 February 2021 of its 

reciprocation request concerning measures taken pursuant to Article 133 of CRD IV and 

Article 458 of Regulation (EU) No 575/201352, as applied to and in Norway on 1 January 2020 
pursuant to the terms of the EEA Agreement (CRR as applicable in Norway). The ESRB was 
notified of these measures on 5 November 2020 regarding the intention to adopt a systemic risk 

buffer requirement for exposures in Norway (see above); a temporary average risk weight floor for 

RRE exposures in Norway, pursuant to Article 458 (10) of the CRR as applicable in Norway; and a 

temporary average risk weight floor for commercial real estate exposures in Norway, pursuant to 
Article 458 (10) of the CRR as applicable in Norway. The systemic risk buffer amounts to 4.5% for 

the domestic exposures of all credit institutions authorised in Norway, including the subsdiaries of 

institutions with parents established in other EEA countries. The temporary risk floor measures for 

residential and commercial real estate exposures in Norway consist of risk floors of 20% and 35%, 

respectively. Regarding the above-mentioned Article 458 measures, the increase in risk weights 

was below 25% and hence did not warrant authorisation (Article 458(10)). All three measures 

entered into force on 31 December 2020. Pursuant to Article 5(4) of Recommendation 

ESRB/2015/4, the ESRB Assessment Team prepared an assessment of the need to adopt a 

recommendation on reciprocation together with a draft amendment of Recommendation 

ESRB/2015/2 (approved by the ESRB on 30 April). The process was still ongoing at the cut-off date 

for drafting the Annual Report. While the two measures taken pursuant to Article 458 of the CRR as 

applicable in Norway were more straightforward to assess, the situation of the systemic risk buffer 

was complicated by the continued application of CRD IV in Norway, while Directive (EU) 2019/878 
of the European Parliament and of the Council53, which introduced significant amendments to 
Directive 2013/36/EU, should have been transposed into national law by the EU Member States by 

28 December 2020. The ESRB has carefully analysed the impact on all involved parties and 

addressed this point by extending the transition period for reciprocation and allowing for equivalent 

52   Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements 
for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p.1). 

53   Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 2013/36/EU as 
regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory 
measures and powers and capital conservation measures (OJ L 150, 7.6.2019, p. 253). 

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measures for reciprocating the systemic risk buffer until Norway transposes Directive (EU) 

2019/878 into national law. 

3.1.3 

ESRB Recommendation on a legal entity identifier 

The global economy is based on a web of contracts and financial transactions, including a 

large number of cross-border contracts covering the entire planet, and is tightly knit in 
extremely complex patterns. This web not only covers financial institutions, but also any type of 
entities that have relationships, contracts and exposures with each other and with the financial 

sector. Within the financial sector, links between banks and non-banks are significant, both in terms 

of direct and intragroup exposures. A clear identification of individual entities and any connections 

among them is key in terms of drawing a reliable map of the global economic and financial 

landscape, reducing financial contagion and promoting financial stability. 

In 2012 the G20 endorsed the recommendations of the Financial Stability Board regarding 

the framework for development of a global legal entity identifier (LEI) system for parties to 

financial transactions and encouraged global adoption of the LEI to help authorities and 
market participants identify and manage financial risk. The use of a unique, exclusive and 
universal LEI has made the authorities better equipped to evaluate systemic and developing risks 

and adopt remedial measures. The LEI has also become a crucial tool for connecting existing 

datasets of granular information on entities from multiple sources. 

At Union level, several existing legislative and non-legislative acts require use of the LEI. 
However, there is no uniform approach across markets and use of the LEI does not currently 

extend to non-financial sectors, leaving LEI coverage fragmented and important sectors excluded. 

Against this background, on 24 September 2020 the ESRB issued Recommendation 
ESRB/2020/12 on identifying legal entities, which aimed to foster the implementation of a Union-
wide legal framework for uniquely identifying legal entities engaged in financial transactions via an 

LEI and making its use in supervisory reporting and public disclosures systematic. 

More specifically, the Recommendation asks the Commission to propose the introduction of 

a Union-wide legal framework to uniquely identify legal entities engaged in financial 

transactions by way of a LEI and to make the use of the LEI more systematic in respect of 
supervisory reporting and public disclosure. Furthermore, taking into account the time frame for 
the adoption of such a Union framework, the ESRB recommended that the relevant authorities 

pursue and systematise their efforts to promote the adoption and use of the LEI, making use for this 

purpose of the various regulatory or supervisory powers which they have been granted by national 

or Union law. 

3.2 

Beyond banking 

Many of the measures the ESRB took to prevent and mitigate the effects of the COVID-19 

pandemic on financial stability in the Union concerned market-based finance and the non-
bank financial sector (see Section 2). This section considers other work designed to develop the 

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macroprudential toolkit beyond the banking sector. In particular, the ESRB considered ways to 

foster central clearing and make the central clearing landscape safer, ways to enhance the 

macroprudential aspects of insurance regulation and ways to enhance the AIFMD. 

3.2.1 
safer 

Fostering central clearing and making the clearing landscape 

3.2.1.1 
for Pension Scheme Arrangements 

ESRB response to ESMA report on Central Clearing Solutions 

The ESRB provided an opinion on the ESMA report on "Central Clearing Solutions for 

Pension Scheme Arrangements". Under Article 85(2) of the European Market Infrastructure 

Regulation (EMIR), ESMA, in cooperation with the ESRB, is required to submit a report every 
12 months on potential central clearing solutions for pension scheme arrangements (PSAs). 
In its opinion the ESRB considered three main elements: the likelihood of PSAs accessing CCPs as 

direct members, the increased risk for CCPs in intermediating repos, and solutions involving central 

bank access. The ESRB considered it unlikely for PSAs to become direct clearing members, 

because of their difficulties with acquiring the technical capabilities to replicate the ancillary services 

provided by clearing members to clients, including the funding of cash margins and collateral 

transformation services. The ESRB furthermore took the view that if CCPs were to provide repo 
facilities to PSAs54, it would increase the non-core risks at CCP level, which in turn would reduce 
the resilience of CCPs in reliably delivering their core functions. In relation to this, the ESRB 

indicated that it strongly supports CCPs as stand-alone entities wholly focused on safeguarding 

financial stability by establishing a resilient central clearing architecture. Finally, the ESRB indicated 

that it is agnostic as to the role of central banks providing liquidity support to PSAs. However, the 

industry should not consider this as a viable option without the prior explicit consent and approval of 

central banks. The ESRB Opinion concluded by stating that the best way to remove obstacles for 

PSAs is to promote indirect clearing. 

3.2.1.2 
services with regards to the clearing obligation 

ESRB response to ESMA report on post trade risk reduction 

The ESRB commented on ESMA's report on post trade risk reduction services (PTRRS) with 
regards to the clearing obligation. Under Article 85(3a) of EMIR the ESRB is required to 
cooperate with ESMA to deliver a report exploring whether, and under what conditions, trades that 

directly result from PTRRS, including portfolio compression and counterparty rebalancing, should 

be exempted from the clearing obligation referred to in Article 4(1) of the same regulation. In its 

response the ESRB focused on the implications of PTRRS in non-centrally cleared OTC markets 

for preventing and mitigating systemic risk and promoting the smooth functioning of the internal 

market. The ESRB supported the widespread and frequent use of post trade risk reduction 

54   Meaning collateralised lending that is a banking activity, which is regulated under the banking framework and is not 

designated as a core CCP activity under the EMIR framework. 

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techniques because they reduce operational complexity and interconnectedness while at the same 

time increasing transparency. While the use of PTRRS in non-centrally cleared OTC markets can 

help to reduce aggregate risk exposures, exempting their use from the clearing obligation may, 

however, introduce the risk of regulatory arbitrage and circumvention. To reflect this, the ESRB 

stated that exemptions from the clearing obligation should only be considered when they contribute 

to reducing systemic risk, subject to appropriate safeguards against the risk of regulatory arbitrage. 

ESRB Secretariat staff response to ESMA’s consultation paper 

3.2.1.3 
on technical standards on reporting, data quality, data access and 
registration of trade repositories under EMIR Refit 

Since the early stages of the EMIR reporting mandate, the ESRB, in partnership with the 

ECB, ESMA and the ESRB member institutions, has worked on analysing the data collected 
under EMIR. This includes the development of a technological infrastructure and analytical 
frameworks that enable the ESRB to monitor daily developments in the EU derivatives market. This 

experience informed the ESRB Secretariat staff response to ESMA’s consultation paper on 

technical standards on reporting, data quality, data access and registration of trade repositories 

under EMIR Refit. The main message of the response was that the ESRB Secretariat strongly 

supports both the scope of the amendments and the technical principles highlighted in the paper. 

The breadth and depth of the proposed amendments were seen as helping improve the reporting 

framework and quality of data, and therefore the usefulness of that data for the authorities. The 

response highlighted the benefits of standardisation of the reporting framework and the higher level 

of granularity and data quality requirements. These changes were implemented in time to enable, 

for instance, the daily monitoring of liquidity risks arising from margin calls in the context of the 

COVID-19 crisis and the daily analysis of developments in central clearing and margins between 

the EU and the UK in the context of Brexit. 

3.2.1.4  Consultation on recognition of third country CCPs 

Following the amendments to the EMIR regulation, (EMIR 2.2), ESMA set up a CCP 

Supervisory Committee charged with preparing decisions on the recognition and 
supervision of third country CCPs (TC CCP) providing services in the European Union. The 
Committee became operational in the second half of 2020 and processed the recognition and 

related tiering of three UK CCPs. At ESMA's request, the ESRB provided an opinion on the 

classification and the subsequent recognition of these TC CCPs. The ESRB assessed LME Clear 

Ltd as Tier 1 (non-systemically important) and LCH Ltd and ICE Clear as Tier 2 (systemically 

important). This was also the assessment that ESMA issued on 28 September 2020 and was the 

basis for the temporary recognition of the three CCPs for a period of 18 months. The ESRB 

expressed opinions to ESMA in line with the September 2020 assessment. 

The ESRB also provided a positive opinion on ESMA’s proposal to extend the temporary exemption 

of the clearing obligation for intragroup derivative transactions that are concluded with a third 

country group entity. 

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3.2.2 

Enhancing the Alternative Investment Fund Managers Directive  

The ESRB proposed improvements to the Alternative Investment Fund Managers Directive 

(AIFMD) by responding in January 2021 to the European Commission’s public 
consultation.55 The AIFMD contributes to the safety of the financial system, including by providing 
the ESRB and supervisory authorities with important data to help analyse systemic risk. In its 

response to the consultation the ESRB proposed several improvements. These cover (i) the 

suitability of the reporting framework and access to data for monitoring systemic risks, including 

more detailed reporting on investments as well as investors in order to better assess the risk of fire 

sales or disorderly markets and spillovers to financial institutions; (ii) the need to operationalise 

existing macroprudential policy instruments, in particular – as previously recommended by the 
ESRB56 – the need for Union legislation to incorporate a common Union legal framework governing 

the inclusion of liquidity management tools in the design of investment funds regulated under both 

the AIFMD and the UCITS Directive; (iii) the ongoing development of the macroprudential policy 

framework for investment funds to mitigate risks stemming from liquidity mismatches and leverage. 

3.2.3 

Enhancing the macroprudential dimension of Solvency II 

The ESRB responded to the European Commission public consultation in October 2020 with 
proposals to enhance the macroprudential dimension of Solvency II.57 Five years after 
entering into force in 2016, the market-based Solvency II regime for insurers is being reviewed by 

the European Commission. In the low interest rate environment and following the COVID-19 crisis, 

the European Commission is investigating the adequacy of insurers' solvency capital requirements, 

their role in the Capital Markets Union and their impact on financial stability. In particular, the long-

term guarantee measures and the way interest rate risk is considered in the standard formula of 

Solvency II are under scrutiny. Both measures have become ever more relevant as risk-free rates 

turned negative in 2019. In its response to the European Commission public consultation, the 

ESRB proposed (a) reflecting macroprudential considerations in Solvency II, (b) implementing a 

harmonised recovery and resolution regime and (c) continuing to ensure that risks are properly 

captured, for example with a more market-based risk-free rate term structure to discount insurers' 

liabilities. 

The ESRB identified three types of tool that would better reflect macroprudential 
considerations in Solvency II. These include solvency tools for preventing and mitigating 
procyclical investment behaviour on the part of insurers; liquidity tools for addressing risks 

stemming from specific activities; and tools for addressing risks stemming from the provision of 

credit to the economy. The COVID-19 pandemic also informed the ESRB's response to the 

consultation. This includes the systemic importance of certain insurance activities such as credit 

insurance for the real economy. The implementation of a macroprudential toolkit would help to 

ensure the provision of these critical insurance services. Also, and in line with its 

55   ESRB response to the European Commission consultation on the review of AIFMD, January 2021. 
56   Recommendation of the European Systemic Risk Board of 7 December 2017 on liquidity and leverage risks in 

investment funds (ESRB/2017/6). 

57  ESRB Response Letter to a Consultation of the European Commission on the review of Solvency II, 16 October 

2020. 

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recommendations,58 the ESRB proposed granting supervisors the power to restrict dividend 

distributions in exceptional circumstances. 

3.3 

Stress testing 

During the review period the ESRB contributed to several stress tests carried out by the 
ESAs by providing the adverse scenarios for those exercises. The ESAs and the ESRB are 
requested to collaborate on stress testing, which generally takes the form of close cooperation in 

designing the scenario to ensure it reflects the current risk landscape and appropriately assesses 
each sector against the key vulnerabilities it is exposed to.59 

3.3.1 

ESMA Money Market Fund stress-testing guidelines 

ESMA is required to annually review and update its stress-testing guidelines for money 
market funds. Following the outbreak of COVID-19, ESMA and the ESRB conducted a review, 
benchmarking the 2019 MMF stress-testing guidelines against the realised market risk factor 

moves of the March 2020 market turmoil. While most of the risk factor moves in the 2019 scenario 

were found to be more severe than those of the March turmoil, the ESRB TFST refined the 

scenario of the 2020 MMF stress test guidelines to ensure that all risk factors would be stressed at 

least to the level of the recently observed stress. The ESRB General Board approved the adverse 

scenario at its meeting on 24 September 2020. ESMA released the updated MMF stress-testing 
guidelines on 15 December 2020.60 

3.3.2 

EBA 2021 EU-wide banking sector stress test 

The European Banking Authority (EBA) normally follows a biennial cycle for its EU-wide 

banking stress test. Owing to the outbreak of the COVID-19 pandemic, the EBA Board of 

Supervisors decided to postpone the 2020 exercise to 2021 in order to allow banks to 
prioritise their operational continuity.61 The ESRB provided a "prolonged COVID-19 scenario" 
that was set against the background of a "lower for longer" interest rate environment. The scenario 

probes the banking sector against important risks stemming both from the potential fallout of the 

pandemic as well as against financial stability risks. The General Board approved the scenario at its 

regular meeting on 15 December 2020, and the EBA subsequently launched the exercise on 29 

January 2021. 

58   Recommendation of the European Systemic Risk Board of 27 May 2020 on restriction of distributions during the 
COVID-19 pandemic (ESRB/2020/7) and Recommendation of the European Systemic Risk Board of 15 December 
2020 amending Recommendation ESRB/2020/7 on restriction of distributions during the COVID-19 pandemic 
(ESRB/2020/15). 

59   The ESRB publishes all the stress test scenarios used for regulatory stress tests of ESAs on a dedicated website. 
60   ESMA updates guidelines on stress tests for money market funds, December 2020.  
61   EBA statement on actions to mitigate the impact of COVID-19 on the EU banking sector, March 2020. 

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3.3.3 

EIOPA insurance stress test 

In May 2021 EIOPA launched a stress test of the EU insurance industry to assess the 
sector’s resilience against adverse economic and financial developments. To this end, the 
ESRB has provided EIOPA with the adverse scenario forming the basis of the stress test 

calculations. While the scenario has been refined to ensure that it adequately targets the main risks 

faced by the insurance sector, its narrative closely follows the “prolonged COVID-19 scenario in a 

lower for longer interest rate environment” of the EBA 2021 scenario. The General Board approved 

the scenario at its regular meeting on 25 March 2021. 

Box 6 
ASC Insights on reforming bank stress testing in the EU: reflections in light 
of the EBA’s discussion paper on the issue 

In July 2020 the ESRB published an ASC Insight entitled "Reforming bank stress testing in the EU: 

reflections in light of the EBA’s discussion paper on the issue", written by Javier Suarez and Willem 

Buiter. The ASC Insight came as a response to the EBA Discussion Paper with some proposals for 

the reform of the banking stress-testing framework in the EU, published earlier in 2020. The ASC 

Insight started from the premise that supervisory sector-wide stress testing of banks is one of the 

major innovations adopted by prudential authorities in recent years. As such, supervisory stress 

testing is a tool in the regular surveillance of the financial system and played a fundamental role in 

the global financial crisis and in the European sovereign crisis. The authors of this ASC Insight 

expressed serious concerns about the two main proposals put forward by the EBA in its paper. 

While acknowledging the need to reform the supervisory stress-testing framework in the EU, the 

authors of the ASC Insight did not consider that the proposals put forward in the EBA's discussion 

paper would improve that framework. First, they expressed reservations about the proposal to 

redefine stress testing as primarily a microprudential tool. Second, they considered that the 

proposal to have two separate “legs” in each stress test exercise (a supervisory leg and a bank leg) 

would impair the reliability and comparability of the information provided to stakeholders in these 

exercises. A proposal for a framework of stress testing serving both micro- and macroprudential 

exercises was provided in the afterword of the ASC Insight. 

3.4 

Cross-cutting issues 

3.4.1 

European Systemic Cyber Group 

Cyber incidents pose a systemic risk to the financial system given their potential to disrupt 

critical financial services and operations and thereby impair the provision of key economic 
functions. In extreme cases, an incident generates (expected) financial costs and causes 
reputational damage to the financial system. The amplification of the initial shock can either occur 

through operational or financial contagion or through an erosion of confidence in the financial 

system. While the later stages of a cyber crisis resemble those seen in a more traditional financial 

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crisis, the impairment of the financial system’s operability adds a new dimension to crisis 

management, including systemic mitigant activation. 

Systemic mitigants prevent a cyber incident from becoming a systemic cyber crisis and 
threatening financial stability. In other words, they help to manage the consequences of a cyber 
incident for the financial system. Supervisory and oversight authorities are already fulfilling their 

mandates by continuing to develop their regulatory frameworks on operational resilience in the 

financial system and therefore promoting the mitigation of cyber risk to individual institutions. These 

preventive tools increase overall operational resilience and reduce the likelihood of severe cyber 

shocks to the financial system, and in doing so act as cyber risk mitigants in themselves. 

Existing macroprudential tools are not designed specifically to manage the impact of a 
cyber incident and thus might have limited capability to serve as mitigants. Such tools mostly 
aim to increase the loss-absorbing capacity of, and to shore up confidence in, the financial system. 

In this way, they can provide backstops for financial and reputational related contagion and 

therefore mitigate the amplification of a cyber incident. However, their design and calibration rely on 

the assumption that functioning operational systems are in place, which might not be the case in a 

systemic cyber crisis. A cyber incident may have the consequence of rendering the use of 

macroprudential tools (operationally) ineffective. Additional systemic mitigants are therefore likely 

needed to address operational-related vulnerabilities and contagion. 

Effective systemic cyber crisis management, including the activation of mitigants, requires 

joint effort and coherent action by financial authorities to address all the different crisis 
facets. This kind of orchestration needs close coordination and open communication between 
financial authorities, which should also have the requisite levels of situational awareness. To 

reduce response time, the implications of a cyber incident on financial stability need to be 

understood quickly. Aside from financial aspects, the overall risk assessment must also take into 

account the magnitude of operational disruptions, and for this reason technical experts, micro- and 

macroprudential supervisors and oversight authorities need to be involved. 

Effective communication is a core ingredient in crisis management coordination. Without it, 

authorities risk taking unilateral action that contradicts or jeopardises the response of other 
ESRB member jurisdictions, causing uncertainty and confusion. Such a coordination failure 
can amplify the threat to the financial system posed by the cyber incident. In this scenario mistrust 

could spread throughout the financial system and thus may lead to an erosion of confidence in the 

financial system. The ESRB European Systemic Cyber Group (ESCG) report perceives such a 

situation as a cyber incident tipping point, at which the shock to the financial system can easily 
amplify and become a systemic event.62 

Through the ESCG the ESRB continued its work on fostering the preparedness of financial 

authorities for a systemic cyber event, so that they can manage the financial consequences 
of a cyber incident and thus maintain financial stability. Moreover, the ESCG investigated the 
appropriateness of existing macroprudential tools and assessed the need to expand the 

macroprudential toolbox to address systemic cyber risk. 

62   Systemic cyber risk, ESRB, February 2020. 

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3.4.2 

Climate risk monitoring 

The Analysis Working Group/Macroprudential Analysis Group Project Team on Climate Risk 

monitoring was tasked with developing quantifiable risk metrics for monitoring climate-

related risks to financial stability as well as developing an initial scenario analysis of 

climate-related stress. It published a report in June 2020 with the following four main 
conclusions:63 (1) climate shocks appear inevitable; (2) climate risk does not appear to be fully 
reflected in asset prices so far; (3) exposures of euro area banks to high-emitting firms appear 

limited on average, but are concentrated in a few large exposures for some banks. Transition risk 

mitigation appears to be gradually taking place; (4) an exploratory scenario analysis suggests that 

transition costs in the form of both economic output and bank capital will be manageable and 

temporary for banks and insurers. 

The work continued into 2021 in the Advisory Technical Committee /Financial Stability 
Committee format. The latest work seeks to fill key gaps in the empirical understanding of the 
impacts of climate-related risk drivers on financial stability in two keyways. First, it builds on findings 

from the report published last year to more comprehensively map climate-related drivers to financial 

risk in the European Union – notably bringing in new insights on physical risk, as well as deepened 

insights on the financial impacts of transition risk. Second, the upcoming report harnesses a 

growing number of modelling initiatives in the European Union official sector to present recent 

advances in scenario analysis for euro area banks, insurers and investment funds. 

63   Positively green: measuring climate change risks to financial stability, ESRB, June 2020. 

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Institutional framework: implementation 

4 
and accountability 

4.1 
recommendations 

Assessment of compliance with ESRB 

ESRB recommendations are not legally binding, but they are subject to an “act or explain” 
regime in accordance with Article 17 of the ESRB Regulation.64 This means that the 
addressees of recommendations – such as the EU as a whole, Member States, the ESAs, the 

national supervisory authorities and the European Commission – have an obligation to 

communicate to the European Parliament, the Council, the Commission and to the ESRB the 

actions that 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 ESRB published the Handbook on the assessment 

of compliance with ESRB recommendations in July 2013 and a revised version in April 2016. 

The following subsections outline the compliance assessments undertaken over the review period. 

4.1.1 
Assessment of compliance with Recommendation 
ESRB/2015/2 on the assessment of cross-border effects of and voluntary 
reciprocity for macroprudential policy measures 

Recommendation ESRB/2015/265 is aimed at promoting a coordinated policy approach 

across borders within the EU and preventing financial service providers from circumventing 
national macroprudential measures. The Recommendation focuses in particular on the 
assessment of the cross-border effects of relevant activating authorities’ own macroprudential 

policy measures ahead of the request for reciprocation. Moreover, it sets out the procedures to be 

followed both when submitting a request for reciprocation and when giving notification of 

reciprocation of other relevant authorities’ macroprudential policy measures. Finally, the 

Recommendation contains a continuously updated list of macroprudential policy measures adopted 

by other relevant authorities and recommended by the ESRB for reciprocation. The first 

assessment of the follow-up to the Recommendation started in the first quarter of 2018 and was 

based on the information provided by the addressees by 30 June 2017. The exercise is ongoing 

and is expected to be completed in the course of 2021. 

64   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). 

65   Recommendation of the European Systemic Risk Board of 15 December 2015 on the assessment of cross-border 

effects of and voluntary reciprocity for macroprudential policy measures (ESRB/2015/2). 

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Assessment of compliance with Recommendation 

4.1.2 
ESRB/2017/6 on liquidity and leverage risks in investment funds and 
Recommendation ESRB/2020/4 on liquidity risk in investment funds 

Recommendation ESRB/2017/666 contains five recommendations: Recommendation A, 

designed to address the risks that may arise when fund managers do not have adequate 
liquidity management tools; Recommendation B, designed to mitigate and prevent excessive 
liquidity mismatches in open-ended alternative investment funds (AIFs); Recommendation C, 

designed to promote coherent liquidity stress-testing practices at the investment fund level; 

Recommendation D, designed to establish a harmonised reporting framework for undertakings for 

collective investment in transferable securities (UCITS) across the Union; and Recommendation E, 

designed to facilitate the implementation of Article 25 of the AIFMD, which provides for a 

macroprudential tool to limit leverage in AIFs. 

ESMA published the guidance referred to in Recommendation B in its Final Report: 
Guidelines on liquidity stress testing in UCITS and AIFs in September 2019. 67 As regards 
Recommendation E, ESMA published its guidance on Article 25 of Directive 2011/61/EU in 
September 2020.68 

Recommendation ESRB/2020/469 contains one recommendation: Recommendation A is 

designed to enhance investment funds’ preparedness to respond to potential future adverse 

shocks that could lead to deterioration in financial market liquidity, resulting in potential 
adverse implications for financial stability conditions in the Union. The ESRB has identified 
two segments as particularly high priority areas that merit closer scrutiny from a financial stability 

perspective: the first of these segments is investment funds with significant exposures to corporate 

debt; the second segment is investment funds with significant exposures to real estate. 

Following the publication of the ESRB Recommendation, ESMA set up a work stream with 

NCAs to agree on a sample of funds, a common methodology, a questionnaire to be sent to 

management companies by NCAs and an assessment template that should be used by 
NCAs to report their assessments to ESMA. NCAs collected data from asset managers, 
reporting back to ESMA staff by 2 September 2020, and submitted their own assessment reports 

by 15 September. On 12 November 2020, ESMA published a report setting out ESMA's analysis 

and conclusions on the preparedness of the investment funds that were reviewed and presenting 

five priority areas identified to enhance the preparedness of funds that have significant exposures 
to corporate debt and real estate assets to potential future adverse shocks.70 

66   Recommendation of the European Systemic Risk Board of 7 December 2017 on liquidity and leverage risks in 

investment funds (ESRB/2017/6). 

67   Final Report, Guidelines on liquidity stress testing in UCITS and AIFs, 2 September 2019, ESMA34-39-882. 
68   Final Report, Guidelines on Article 25 of Directive 2011/61/EU, 17 December 2020, ESMA34-32-552.  
69   Recommendation of the European Systemic Risk Board of 6 May 2020 on liquidity risks in investment firms 

(ESRB/2020/4). 

70   Report on Recommendation of the European Systemic Risk Board (ESRB) on liquidity risk in investment funds, 12 

November 2020, ESMA34-39-1119. 

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The joint assessment of the follow-up to the ESRB recommendations started in the fourth quarter of 

2020 and was based on the information provided by the addressees by 30 June 2019 and 31 

December 2020. The exercise is ongoing and is expected to be completed in the course of 2021. 

4.1.3 
ESRB/2016/4 on closing real estate data gaps 

Assessment of compliance with Recommendation 

The objective of Recommendation ESRB/2016/1471 as amended by Recommendation 

ESRB/2019/372 is that national macroprudential authorities should implement a framework 

for monitoring developments in the real estate sector relevant for financial stability based 
on commonly agreed target definitions and indicators. The Recommendation is divided into six 
sub-recommendations (e.g. A, B, C, D, E and F), with sub-recommendations A, B, C and D being 

addressed to national macroprudential authorities, sub-recommendation E addressed to European 

Supervisory Authorities (ESAs) and sub-recommendation F addressed to the Commission 

(Eurostat). 

Macroprudential authorities delivered their interim reports to the ESRB pursuant to 
recommendations A to D, which were due by 31 December 2019. On 19 February 2021 the 
General Board approved the extended note pertaining to the assessment of compliance with sub-

recommendations A and D. 

The follow-up assessment of sub-recommendations A and B started in January 2021 and 

was based on the final report submitted by national macroprudential authorities by 31 
December 2020. The exercise is ongoing and is expected to be completed in the course of 2021. 

Assessment of compliance with Recommendation 
4.1.4 
ESRB/2015/1 on recognising and setting countercyclical buffer rates for 
exposures to third countries 

Recommendation 2015/173 aims to promote a coherent approach across the Union for 

recognising and setting countercyclical capital buffer (CCyB) rates for exposures to third 

countries, helping to protect the banking sector in EU Member States from risks associated 

with excessive credit growth to the private non-financial sector in third countries and in 
order to ensure a level playing field within the Union and prevent regulatory arbitrage. The 
Recommendation is intended to ensure that designated authorities recognise CCyB rates set by 

third country authorities and set CCyB rates for exposures to third countries also with the purpose 

of addressing risks that might abate or materialise. 

71   Recommendation of the European Systemic Risk Board of 31 October 2016 on closing real estate data gaps 

(ESRB/2016/14). 

72   Recommendation of the European Systemic Risk Board of 21 March 2019 amending Recommendation 

ESRB/2016/14 on closing real estate data gaps (ESRB/2019/3). 

73   Recommendation of the European Systemic Risk Board of 11 December 2015 on recognising and setting 

countercyclical buffer rates for exposures to third countries (ESRB/2015/1). 

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The compliance report on sub-recommendations B(1), B(2) and recommendation D was 
finalised in October 2017. The implementation of Recommendation A, sub-recommendations B(1) 
and B(3) and Recommendation C, which were due by 31 December 2020, is currently being 

assessed. The exercise is ongoing and is expected to be completed in 2021. 

4.1.5 
ESRB/2020/6 

Assessment of compliance with Recommendation 

On 25 May 2020 the ESRB issued Recommendation ESRB/2020/6 on liquidity risks arising 

from margin calls.74 Recommendations A and D aim to ensure that sudden and significant 

(hence procyclical) changes and cliff effects relating to initial margins and collateral are 
limited. Furthermore, Recommendation B aims to ensure that CCPs capture comprehensively in 
their liquidity stress testing any events that could lead to them experiencing a liquidity shortfall, with 

a view to incentivising them to better manage their resilience on liquidity service providers. Finally, 

Recommendation C aims to ensure that CCPs, while maintaining their financial resilience, limit the 

asymmetry in the payment of variation margins collected intraday – and that they design their 

margin frameworks and schedules so as to be predictable and avoid excessive liquidity constraints 

for clearing members that could lead to default events. 

Follow-up reports by the addressees of recommendations A, B(2), B(3), B(4) and C were due by 30 

November 2020 and are currently being assessed by a dedicated Assessment Team. This exercise 

is expected to be completed in 2021. 

4.1.6 
ESRB/2020/7 and Recommendation ESRB/2020/15 

Assessment of compliance with Recommendation 

On 27 May 2020 the ESRB issued Recommendation ESRB/2020/7 on restriction of 

distributions during the COVID-19 pandemic, asking the relevant authorities to request the 

financial institutions under their supervisory remit to refrain, at least until 1 January 2021, 

from undertaking any action which has the effect of reducing the quantity or quality of their 

own funds at the EU group level (or at the individual level where the financial institution is 

not part of an EU group), and, where appropriate, at the sub-consolidated or individual 
level.75 Those actions include dividend distribution or irrevocable commitment to make a dividend 
distribution, buy-back of ordinary shares and creation of an obligation to pay variable remuneration 

to a material risk-taker. The Recommendation covers banks, certain investment firms, insurers, 

reinsurers and central counterparties. 

The implementation of the Recommendation has been assessed by a dedicated Assessment 
Team which started its work in September 2020. The assessment of the first phase was based 
on the information provided by the addressees by 31 July 2020. This exercise was completed in the 

74   Recommendation of the European Systemic Risk Board of 25 May 2020 on liquidity risks arising from margin calls  

(ESRB/2020/06). 

75   Recommendation of the European Systemic Risk Board of 27 May 2020 on restriction of distributions during the 

COVID-19 pandemic (ESRB/2020/7). 

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second quarter of 2021. The results of the assessment of compliance with the first phase of 

Recommendation ESRB/2020/7 will be published together with the results of the assessment of the 

second phase in the course of 2022. 

In December 2020 Recommendation ESRB/2020/7 was amended by Recommendation ESRB 
/2020/15, including the date until which the restriction of distributions should apply.76 The 
implementation of the amended Recommendation will be assessed in the fourth quarter of 2021 

based on the information that will be provided by the addressees by 15 October 2021. 

4.1.7 
ESRB/2020/8 

Assessment of compliance with Recommendation 

On 27 May 2020 the ESRB issued Recommendation ESRB/2020/8 on monitoring the financial 

stability implications of debt moratoria, and public guarantee schemes and other measures 

of a fiscal nature taken to protect the real economy in response to the COVID

19 pandemic.77 

Recommendation A aims to ensure that national macroprudential authorities monitor and assess 

‐

the financial stability implications of COVID-19-related measures taken by their Member States to 

protect the real economy, such as debt moratoria, public guarantee schemes and other measures 

of a fiscal nature. Recommendation B establishes a framework for national macroprudential 

authorities to conduct regular reporting of the information necessary for the ESRB to monitor and 

assess the implications of the national measures referred to in Recommendation A for financial 

stability in the European Union. 

In December 2020 the ESRB published a compliance report on the implementation of 
Recommendation A. The overall assessment revealed a high degree of compliance with 
recommendation A among the addressees.78 Follow-up interim reports by the addressees of 

recommendation B were due by 31 December 2020 and are currently being assessed by a 

dedicated Assessment Team. This exercise is expected to be completed in the course of 2021. 

4.1.8 
ESRB/2019/18 

Assessment of compliance with Recommendation 

On 26 September 2019 the ESRB issued Recommendation ESRB/2019/18 on exchange and 

collection of information for macroprudential purposes on branches of credit institutions 
having their head office in another Member State or in a third country.79 Taking into account 
the increasing provision of cross-border financial services via branches within the Union, the 

Recommendation aims to enhance the exchange and collection of information on branches for 

76   Recommendation of the European Systemic Risk Board of 15 December 2020 amending Recommendation 

ESRB/2020/7 on restriction of distributions during the COVID-19 pandemic (ESRB/2020/15). 

77   Recommendation of the European Systemic Risk Board of 27 May 2020 on monitoring the financial stability 

implications of debt moratoria, public guarantee schemes and other measures of a fiscal nature taken to protect 
the real economy in response to the COVID-19 pandemic (ESRB/2020/8). 

78   27 addressees were assessed as “Fully Compliant” (FC) and the remaining four as “Largely Compliant” (LC). 

79   Recommendation of the European Systemic Risk Board of 26 September 2019 on exchange and collection of 

information for macroprudential purposes on branches of credit institutions having their head office in another 
Member State or in a third country (ESRB/2019/18). 

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macroprudential and financial stability purposes. In particular Recommendation A recommends that 

the relevant authorities exchange the information deemed necessary for the discharge of their tasks 

related to the adoption and/or activation of macroprudential policy measures or for other financial 

stability tasks and establish memoranda of understanding or other forms of voluntary arrangements 

for cooperation and exchange of information among themselves. 

Follow-up interim reports by the addressees of recommendation A were due by 31 
December 2020 and are currently being assessed by a dedicated Assessment Team. This 
exercise is expected to be completed in the third quarter of 2021. 

4.1.9 
Assessment of compliance with Recommendations 
ESRB/2019/4, ESRB/2019/5, ESRB/2019/6, ESRB/2019/7, ESRB/2019/8 
and ESRB/2019/9 

On 27 June 2019 the ESRB decided to issue six country-specific recommendations on 

medium-term residential real estate (RRE) sector vulnerabilities, following a systematic and 
forward-looking assessment of the RRE sector covering the entire EEA. The 
recommendations were sent to the competent ministers of Belgium80, Denmark81, Finland82 
Luxembourg83, the Netherlands84, and Sweden85. Given that the identified vulnerabilities relating to 

the RRE sector as a source of systemic risk vary across countries, the recommendations consist of 

different policy actions. Accordingly, different deadlines for implementation apply. 

The first deadline for addressees to submit follow-up reports on the level of implementation was 31 

October 2020. The assessment of compliance with these recommendations based on the follow-up 

reports submitted by 31 October 2020 was concluded in the second quarter of 2021. 

80   Recommendation of the European Systemic Risk Board of 27 June 2019 on medium-term vulnerabilities in the 

residential real estate sector in Belgium (ESRB/2019/4). 

81   Recommendation of the European Systemic Risk Board of 27 June 2019 on medium-term vulnerabilities in the 

residential real estate sector in Denmark (ESRB/2019/5). 

82   Recommendation of the European Systemic Risk Board of 27 June 2019 on medium-term vulnerabilities in the 

residential real estate sector in Finland (ESRB/2019/8). 

83   Recommendation of the European Systemic Risk Board of 27 June 2019 on medium-term vulnerabilities in the 

residential real estate sector in Luxembourg (ESRB/2019/6). 

84   Recommendation of the European Systemic Risk Board of 27 June 2019 on medium-term vulnerabilities in the 

residential real estate sector in the Netherlands (ESRB/2019/7). 

85   Recommendation of the European Systemic Risk Board of 27 June 2019 on medium-term vulnerabilities in the 

residential real estate sector in Sweden (ESRB/2019/9). 

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4.2 
institutional aspects 

Reporting to the European Parliament and other 

4.2.1 
Monetary Affairs of the European Parliament 

ESRB Chair's hearing before the Committee on Economic and 

In line with the ESRB’s accountability and reporting obligations86, 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 via a webcast accessible on 
the ESRB’s website. Both hearings in 2020 were held remotely owing to the COVID-19 pandemic. 

The opening remarks of the ESRB Chair 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 and on the macroprudential policy options recommended. 

The main points of the two most recent hearings are summarised below. 

At the hearing before ECON on 8 June 2020, the ESRB Chair focused on the ESRB’s response 
to the challenges posed by the COVID-19 pandemic. She highlighted the ESRB’s assessment of 

the main vulnerabilities exposed by the pandemic and the five priority areas for action identified by 

the ESRB. MEPs were provided with first-hand information on the set of actions taken by the ESRB 

in those priority areas as well as on the underlying rationale. Regarding the ESRB’s medium-term 

priorities, the Chair announced the publication of the ESRB report on financial stability risks related 

to climate change and discussed its main findings. 

At the hearing on 19 November 2020, the ESRB Chair discussed two main areas. First, she 
explained the further actions taken in the non-banking sector in the context of the ESRB’s response 

to the COVID-19 pandemic. Second, she provided MEPs with the ESRB’s current assessment of 

the risks to financial stability, focusing particularly on banking issues and policy priorities going 

forward. Finally, the ESRB Chair marked the adoption of the ESRB Recommendation on the use of 

a legal entity identifier. 

In addition to the public hearings, the ESRB Chair holds confidential discussions on the work of the 
ESRB with the Chair and Vice-Chairs of ECON, when appropriate.87 

4.2.2 

Other institutional relations 

The ESRB held its annual meeting with the Committee of European Audit Oversight Bodies 

and statutory auditors of EU-based global systemically important financial institutions (G-
SIFIs) on 3 and 4 November 2020. Owing to the restrictions in place as a result of the COVID-19 
pandemic, the meeting took place remotely. The meeting is required by EU law88 in order to inform 

86   Article 19 of the ESRB Regulation. 

87   Article 19(5) of the ESRB Regulation. 

88   Article 12(2) of Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific 
requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC (OJ L 
158, 27.5.2014, p. 77). 

ESRB Annual Report 2020 
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the ESRB of sectoral developments or any significant developments at G-SIFIs. The discussion 

focused on the immediate and long-term impact of the COVID-19 pandemic on banks and insurers, 

on how the audit work may be affected by the pandemic, and on the role of auditors in the 

prevention of fraud in accounting. 

The ASC awards an annual prize (the Ieke van den Burg Prize) to recognise outstanding 
research conducted by young scholars on topics related to the ESRB’s mandate. The annual 
prize was established in 2014 in memory of Ieke van den Burg, who was a member of the ASC 

(2011-14) and a Member of the European Parliament (1999-2009). In 2020 the prize was awarded 

to Marcus Mølbak Ingholt for his paper entitled “Multiple Credit Constraints and Time-Varying 
Macroeconomic Dynamics”.89 

4.2.3 

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. During the review period, Claudia Buch, the Vice-President of the Deutsche 
Bundesbank, was appointed as the ATC Vice-Chair. In addition, Professor Javier Suarez 

succeeded Professor Richard Portes as Chair of the ASC, while Professor Stephen Cecchetti and 

Professor Loriana Pelizzon became Vice-Chairs of the ASC. Lastly, Emmanuelle Assouan, from the 

Banque de France, succeeded Thomas Schepens from the Nationale Bank van België/Banque 

Nationale de Belgique as the Co-Chair of the ATC Analysis Working Group (AWG). 

From 1 April 2020 to the end of March 2021 there were 20 active working groups within the ESRB. 

Overall, 133 meetings of the General Board, Steering Committee, ASC and ATC substructures 

were organised. 

The ECB supports the work of the ESRB in various ways. 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, the ECB ensures the functioning of the Secretariat of the ESRB and thereby 

provides the ESRB with analytical, statistical, logistical and administrative support. In 2020 the ECB 

provided the ESRB with support in the form of 63.37 full-time equivalent (FTE) staff. Of these, 

32.11 FTEs were employed within the Secretariat and 31.26 FTEs provided other forms of support. 

The direct costs incurred by the ECB amounted to €9.9 million. The indirect costs for other support 

services shared with the ECB (e.g. human resources, IT, general administration) are in addition to 

this amount. Over the same period, other member institutions of the ESRB provided approximately 

55.3 FTEs for analytical support within the context of ESRB groups and ESRB group chair 

positions. 

89   See the ESRB’s website for more information on the Ieke van den Burg Prize. 

ESRB Annual Report 2020 
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Annex 1: Publications on the ESRB’s website 
from 1 April 2020 to 31 March 2021 

ESRB reports and papers 

Working papers 

31/03/2021 

The importance of technology in banking during a crisis 

15/03/2021 

Procyclical asset management and bond risk premia 

15/03/2021 

Cross-border credit derivatives linkages 

01/02/2021 

Financial crises, macroprudential policy and the reliability of credit-to-GDP gaps 

16/11/2020 

Retrenchment of euro area banks and international banking models 

01/10/2020 

Debt holder monitoring and implicit guarantees: did the BRRD improve market discipline? 

01/09/2020 

Gap-filling government debt maturity choice 

15/04/2020 

A dynamic network model to measure exposure diversification in the Austrian interbank 
market 

Occasional papers 

13/07/2020 

Pension schemes in the European Union: challenges and implications from macroeconomic 
and financial stability perspectives 

ESRB Annual Report 2020 
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04/05/2020 

The making of a cyber crash: a conceptual model for systemic risk in the financial sector 

ESRB Reports 

16/02/2021 

Financial stability implications of support measures to protect the real economy from the 
COVID-19 pandemic 

Infographics 

21/01/2021 

Preparing for the post-pandemic rise in corporate insolvencies 

01/12/2020 

Financial stability policies and bank lending: quasi-experimental evidence from Federal 
Reserve interventions in 1920-21 

05/08/2020 

Reforming bank stress testing in the EU: reflections in light of the EBA’s discussion paper 
on the issue 

23/07/2020 

ESRB Annual Report 2019 

08/06/2020 

Liquidity risks arising from margin calls 

08/06/2020 

System-wide restraints on dividend payments, share buybacks and other pay-outs 

08/06/2020 

Positively green: measuring climate change risks to financial stability 

14/05/2020 

Issues note on liquidity in corporate bond and commercial paper markets 

29/04/2020 

A Review of Macroprudential Policy in the EU in 2019 

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Risk Dashboard 

18/12/2020 

ESRB Risk Dashboard, December 2020 (Issue 34) 

ESRB Risk Dashboard - Annex I 

ESRB Risk Dashboard - Annex II 

01/10/2020 

ESRB Risk Dashboard, September 2020 (Issue 33) 

Overview note 

ESRB Risk Dashboard - Annex I 

ESRB Risk Dashboard - Annex II 

02/07/2020 

ESRB Risk Dashboard, July 2020 (Issue 32) 

Overview note 

ESRB Risk Dashboard - Annex I 

ESRB Risk Dashboard - Annex II 

09/04/2020 

ESRB Risk Dashboard, April 2020 (Issue 31) 

ESRB Annual Report 2020 
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50 

 
 
 
Imprint 

© European Systemic Risk Board, 2021 

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 2021. 

For specific terminology please refer to the ESRB glossary (available in English only). 

ISSN 
ISBN 
DOI 
EU catalogue No 

1977-5083 (pdf) 
978-92-9472-187-7 (pdf) 
10.2849/192402 (pdf) 
DT-AA-21-001-EN-N (pdf)