Response to the EC’s consultation on the “Review of the EU Macroprudential Policy Framework”

24 October 2016

Consultation response

Executive summary:

  • The macroprudential framework in the EU is still quite rudimentary and lacks a robust institutional backbone. At the EU level, the ESRB should be given a stronger role with additional competencies, e.g. to review regulatory measures and to ensure the consistency of systemic risk assessment and macroprudential frameworks, both across Member States and between European authorities and institutions.
  • The ESRB could, in particular, be called upon to:- review and opine on proposed regulatory measures at the EU level that concern systemic risk;- provide formal opinions and arbitrate between national and European authorities and institutions regarding matters that concern systemic risk; and- provide guidance to Member States on matters related to macroprudential stability and review and clear proposed measures for application across multiple Member States.
  • At the national level, designated authorities should have a robust mandate to participate in macroprudential policy setting and to provide regular, specific and authoritative guidance to policymakers and other regulatory authorities.
  • Designated authorities should provide guidance and set boundary conditions with regard to the assessment of systemic risks. Competent authorities should remain free to impose measures on individual institutions based on financial stability considerations while taking into account the designated authority’s guidance.
  • The macroprudential framework should be expanded beyond banking to address, in particular, potential spillover from the formal banking sector into “shadow banking”:- The “bail-in” tool for systemically important banks (SIBs) seeks to shift banking-sector risks away from governments and taxpayers and distribute them among equity and bond investors instead. Most of the securities issued by SIBs and eligible for “bail-in” are held by institutional investors. Both sides of this market, sell-side and buy-side, are highly concentrated and the risk of cross-sectoral contagion is, in our view, substantial.- Recent initiatives to encourage direct lending by insurers, asset managers and pension funds are channelling credit risk into sectors of the financial markets that are not designed, and generally not as well equipped, for the evaluation and management of credit risk. Micro-prudential regulation of banks is targeted, specifically, at rendering them resilient to credit and liquidity risks, which they are designed to handle. By-passing the banking sector transfers risk to sectors which are, by design, geared towards coping with entirely different categories of risk, e.g. market and liquidity risks, with potentially detrimental effects on the overall stability of the system.
  • We agree that an expansion of the macroprudential toolset should be considered, including, for instance:- a leverage ratio, which should be implemented as a primary capital measure, on a par with the RWA-based metrics, and construed as a binding constraint;- demand-side constraints, such as Loan-to-Value (LTV) and Loan-to-Income (LTI) ratios;- tools to reduce pro-cyclical leverage and contain systemic risk in the derivatives and repo markets, such as caps on the re-use of collateral and minimum haircut rates for securities-financing transactions;

    – restrictions on cross-holdings of TLAC/MREL instruments by G-SIIs and O-SIIs to prevent systemic contagion; and

    – structural measures, such as the separation of banking groups into resolution units based on their activities, supported by dedicated, ring-fenced regulatory capital.

For further questions, please contact Christian M. Stiefmueller, senior policy analyst at Finance Watch.