Building stronger macroprudential frameworks  The ESRB has promoted stronger macroprudential frameworks across the Union. Specifically the ESRB has issued recommendations to encourage national legislators to establish macroprudential authorities within their jurisdictions. Its Handbook on Operationalising Macroprudential Policy in the Banking Sector embodies practical information on how to set policy using the newly-established powers. The Handbook sets out best practice on an instrument by instrument basis, suggests indicators to guide their use, and outlines the legal framework governing them. It also details potential spillovers. Where it judges that best practice is not being followed, the ESRB can use “soft law” to issue recommendations on an “act or explain” basis to mitigate financial stability risks and curb spillovers. For example, last year the ESRB gave guidance to national macroprudential authorities on how to set countercyclical capital buffer rates. The ESRB will follow up that guidance with a published assessment of implementation in 2016 Q3. With macroprudential policy still in its adolescence, the ESRB is helping it to mature. BIS central bankers’ speeches  1  Recent ESRB studies have evaluated the case for using margining to counteract pro-cyclical behaviour in derivatives and securities financing transactions. And this year, the ESRB assessed the value of including macroprudential buffers within the leverage ratio framework. The Bank of England has followed this approach to ensure that the leverage ratio complements the risk-weighted capital framework in a way that makes it robust to cyclical and structural risks.

One of the strengths of the ESRB is its ability to harness data and conduct analysis across all EU Member States. In its work on the leverage ratio, the ESRB collected new empirical evidence showing banking sector leverage has been pro-cyclical at an aggregate level in almost all Member States. Average risk weights tend to fall in credit booms and rise in downturns. Working with EBA data, the ESRB found that systemically important banks in Europe typically have lower risk weights and leverage ratios than other types of banks. Taken together, theory and evidence demonstrate the importance of a dynamic leverage ratio to a robust macroprudential framework. Another way that the ESRB has led in identifying best practice and influencing the international agenda has been to take a macroprudential perspective on how elements of the financial system can support long-term prosperity. For example, in its examination of Solvency II, the ESRB has considered how long-term investors like insurers can bring diversity and stability to the system. In my view, more can be done to ensure that Solvency II creates the right framework for long-term investment. The ESRB can provide a constructive and objective macroprudential perspective as an input to Parliament’s review in 2018 of aspects of the operation of Solvency II. Openness puts a premium on shared understanding of risks. The ESRB plays a vital role for the EU, enhancing members’ assessment of new and evolving risks. The structure of the financial system has changed significantly since the crisis.