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In 2019 macroprudential policymakers continued to operate in an environment of elevated financial stability risks. Generally, the macro conditions remained a source of concern: first, the medium-term outlook for global economic growth remained weak amid elevated (geo)political and policy uncertainties; second, asset prices continued to be subject to the threat of a sudden reassessment of risk premia; third, slowing growth momentum and rising risk premia could further test debt sustainability in the public and private sectors across the European Union (EU); and fourth, over time, the macroeconomic environment might pose fundamental challenges to traditional business models of EU banks, insurers and pension schemes. Furthermore, these vulnerabilities might be exacerbated by the implications of the current low or even negative yield curve. Finally, risks to financial stability might result from climate change, cyber incidents and disruptions in critical financial infrastructures.1 Against this backdrop of elevated risks, macroprudential policymakers used the tools at their disposal to target risks in the banking sector and beyond. Most macroprudential measures were taken to address arising or prevailing cyclical risks in the banking sector. However, the growing importance of the non-bank financial system has resulted in an increased focus on assessing and tackling risks and vulnerabilities beyond the banking sector. This Review provides an overview of developments in the macroprudential policy framework and of the macroprudential measures for both banks and non-banks that were adopted or were in place in 2019. The Review also provides a light-touch update on the release of the countercyclical capital buffers and the recalibration/removal of other capital buffers for banks in the light of the COVID-19 pandemic which had been announced by 31 March 2020. The Review covers actions of EU institutions, EU Member States or Member States of the European Economic Area (EEA), i.e. EU Member States plus Iceland, Liechtenstein and Norway, if information is available to the ESRB.
The COVID-19 pandemic caused an unprecedented global health crisis and a deep economic recession. Swift and comprehensive 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 was highly uneven on account of the pronounced dispersion of value-added growth across sectors of economic activity and across euro area countries. The easing of measures towards the end of the second quarter facilitated a strong rebound in economic activity in the third quarter. The decline in real gross domestic product (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 vaccines created an anchor for medium-term expectations, new waves of COVID-19 infections heavily weighed on recovery prospects. Short-term uncertainty remains very high on account of delays in the rollout of vaccinations and concerns about the effectiveness of vaccines with respect to rapidly spreading COVID-19 virus mutations. Economic growth is therefore expected to gain momentum only in the second half of 2021. Significant uncertainty also persists over the medium term, as the size of spillovers from heightened vulnerabilities in the non-financial corporation (NFC) and household sectors to the financial system and public finances as well as the scope of permanent structural changes as a result of the COVID-19 crisis remain unclear. The main source of systemic risk in the EU originates from the negative impact of the pandemic on economic activity, rising solvency pressures in the private sector and their feedback effects on the financial system. To date, the swift and broad-based policy support measures have helped stabilise household incomes and mitigate the decline in the cash-flow of the corporate sector. But debt service moratoria are gradually phased out, while other government support programmes are likely to become more targeted and will be terminated at some point-not least depending on the perceived fiscal space in individual Member States. In the meantime, firms in several sectors continue to suffer from a substantial fall in revenues after exhausting their cash buffers and face difficulties in rolling over their maturing debt. 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 ahead, 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.
The newly-issued ESRB report "A review of macro-prudential policy in the EU one year after the introduction of the CRD/CRR" aims at offering a broad overview upon the macroprudential measures so far implemented in the EU countries, either on a standalone basis or as implementation of the provisions laid down in the CRR/CRD IV package. By referring to the ESRB report, this short article seeks to scrutinize the current "State of the Art" of macroprudential policy in Italy. In doing so, we seek to explore the different institutional and economic reasons that seem to justify the Italian legislator in maintaining a limited macroprudential framework. Although this regulatory choice may appear reasonable today, we point out that the benefits for Italian credit institutions - and for the overall economy - relative to the non-application of stronger macroprudential instruments might be outweighed by the costs of future financial shocks.
This Review provides an overview of the measures of macroprudential interest that were adopted in the European Union (EU) in 2018. Most Member States adopted macroprudential measures in 2018. For the EU as a whole, more measures were taken than in 2017, i.e. the previous review period. Apart from the activation of the countercyclical capital buffer (CCyB) and the increase in the CCyB rate in several European Economic Area (EEA) Member States (see below), nine Member States introduced a systemic risk buffer (SyRB) or recalibrated the SyRB rate. After that, the most frequently introduced measure in 2018 pertained to caps on debt service-toincome (DSTI) ratios. Changes to the methodology used to identify systemically important institutions (SIIs) and set their buffers were also made relatively often. An increase over 2017 can be observed also in reciprocation measures following the ESRB's recommendations to reciprocate Finland's and Belgium's measures taken under Article 458 of the Capital Requirements Regulation (CRR). As there are indications that the financial cycle is turning in some countries, more Member States tightened the CCyB. By the end of 2018, twelve countries in the EEA had decided on a positive rate. Despite extensive international and European guidance for the use of this instrument, differences in key features of the national frameworks remained. These include the objective of the instrument, the neutral buffer rate and the indicators used to inform the buffer decision. Given shortcomings of the credit-to-GDP gap as a reference indicator for CCyB decisions, in particular after periods of prolonged excessive credit growth and for transition economies, some Member States developed adjusted indicators and placed greater weight on additional indicators and discretion to arrive at a policy judgement. Financial stability risks in the real estate sector continued to be an important area of macroprudential policy in 2018. Most Member States had at least one measure in place designed to address risk in the residential real estate (RRE) sector, while almost half of the countries adopted measures to tackle risks in the commercial real estate (CRE) sector. Some RRE measures adopted in 2018 targeted a narrower geographical area than the country. The Member States to which the ESRB had issued warnings in 2016, about medium-term vulnerabilities resulting from the RRE sector, took further policy action in 2018, e.g. by expanding the available set of instruments or by using capital or borrower-based instruments.
Macroprudential policy focuses on the financial system as a whole, as distinct from individual institutions, and its objective is to limit the costs to the real economy from system-wide distress of the financial sector. This book helps readers discover and decipher the multi-faceted and fascinating area of macroprudential policy through taking a theoretical, interdisciplinary and legal-focused approach.
The Capital Requirements Directive and Regulation (CRD/CRR) aim to strengthen the resilience of the banking sector so it can better absorb economic shocks, while ensuring banks continue to finance economic activity and growth. Banks have a crucial role in allocating capital efficiently in the economy by providing credit to those households and firms that can best use it, as well as supporting their liquidity and risk management, and are also essential intermediaries in payment systems. Banks therefore need to be able to withstand economic shocks to avoid harmful disruptions to their services. Since 2014 the CRD/CRR also provide a macroprudential toolkit, enabling authorities to react to both cyclical systemic risks (e.g. those related to the financial cycle) and structural ones (e.g. those related to interconnectedness, financial market structure or the business models of financial intermediaries at a given point in time). Since CRD IV/CRR came into force in 2014 and CRD V/CRR II in 2020, the resilience of the EU banking sector has further increased, mainly due to higher capital requirements, better quality of capital and higher liquidity buffers. Additional progress is expected with the upcoming CRD VI/CRR III, which will incorporate the latest global regulatory reform, i.e. Basel III, into EU law. A further review of EU regulation is expected in 2022, with a focus on the macroprudential policy toolkit. All proposals included in this Concept Note are therefore intended to be compatible with full, timely and consistent implementation of Basel III in the European Union. Through this Concept Note the ESRB General Board takes a comprehensive view and proposes enhancements to the existing EU macroprudential framework for the banking sector - and beyond - for the next decade.
The report describes the macro-prudential measures adopted in the EU in this first year (that is, until end 2014) and draws some general conclusions. In doing so, it uses a list of measures of macroprudential interest established by the ESRB Secretariat with input from the ATC and its substructures. The measures almost exclusively cover the banking sector, which is therefore also the focus of this report. Where relevant, reference is made in the report, in brackets, to the situation in the EEA countries. In practice this only relates to Norway, which has been quite active in the macro-prudential area and also participates in some of the ESRB's work.
This paper presents an overview of key proposals formulated by the European Systemic Risk Board (ESRB), the European Banking Authority (EBA) and the European Central Bank (ECB) in the context of the review of the macroprudential policy framework of the European Union (EU), aimed at improving its operation and efficiency over the medium term.
Economic growth, low inflation, and financial stability are among the most important goals of policy makers, and central banks such as the Federal Reserve are key institutions for achieving these goals. In Asset Prices and Monetary Policy, leading scholars and practitioners probe the interaction of central banks, asset markets, and the general economy to forge a new understanding of the challenges facing policy makers as they manage an increasingly complex economic system. The contributors examine how central bankers determine their policy prescriptions with reference to the fluctuating housing market, the balance of debt and credit, changing beliefs of investors, the level of commodity prices, and other factors. At a time when the public has never been more involved in stocks, retirement funds, and real estate investment, this insightful book will be useful to all those concerned with the current state of the economy.
This paper provides the most comprehensive empirical study of the effectiveness of macroprudential instruments to date. Using data from 49 countries, the paper evaluates the effectiveness of macroprudential instruments in reducing systemic risk over time and across institutions and markets. The analysis suggests that many of the most frequently used instruments are effective in reducing pro-cyclicality and the effectiveness is sensitive to the type of shock facing the financial sector. Based on these findings, the paper identifies conditions under which macroprudential policy is most likely to be effective, as well as conditions under which it may have little impact.