Luis de Guindos: Macroprudential policy ten years after the crisis

Macroprudential policy ten years after the crisis

Keynote speech by Luis de Guindos, Vice-President of the ECB, at the CIRSF Annual International Conference 2019 “Financial Supervision and Financial Stability Ten Years after the Crisis: Achievements and Next Steps”, Lisbon, 4 July 2019

• [1] At the same time, the European System of Financial Supervision was introduced, aimed at ensuring consistency and appropriate financial supervision in the EU.
• It includes the European Banking Authority (EBA), which provides harmonised prudential rules for financial institutions in the EU, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority.
• Only last month, the Eurogroup agreed to equip the Single Resolution Fund with a backstop financed by the ESM to further strengthen the European financial architecture.
• Non-bank financial entities such as investment funds, insurance companies and pension funds also take on risks and can amplify the wider financial cycle.
• So it is more important than ever that macroprudential policies are broadened to cover these non-bank financial entities as well.

Financial stability and macroprudential policy in the Economic and Monetary Union

• [3] In this environment, the ECBs accommodative monetary policy is necessary for inflation to remain on a sustained path towards levels that are below, but close to, 2% over the medium term.
• [4] At the same time, the environment indicates that risks to economic growth are tilted to the downside.
• This increase has been facilitated by the general recovery, supported by the ECBs accommodative monetary policy, and is a reaction to increased market pressures and additional macroprudential requirements.
• Indeed, macroprudential policy aims to maintain a strong and stable financial system.
• It has become a crucial complement to the ECBs monetary policy which is geared towards achieving price stability.
• While the current accommodative monetary policy is supporting the economic recovery, it may generate undesired side effects in the form of excessive risk-taking.

Institutional set-up of macroprudential policy within European banking supervision

• This more targeted application of macroprudential policy to individual countries is also reflected in its institutional set-up.
• To operate this two-tier set-up effectively, the SSM Regulation provides that national authorities must notify the ECB of macroprudential measures they intend to implement.
• The ECBs Governing Council may object to these measures and, if deemed necessary, set higher macroprudential requirements than those set by national authorities, commonly known as top-up.
• Second, macroprudential policy authorities, represented by national central banks and supervisors, come together at the ECBs Financial Stability Committee (FSC).
• The FSC serves as the central platform of exchange at the technical level for authorities to share their experience in financial stability and macroprudential policy.
• The Committee has achieved important milestones in increasing data coverage and quality, assessing systemic risk and developing calibration strategies for macroprudential instruments.
• [8] First, the capital conservation buffer of 2.5% is applied to all banks to maintain capital in the banking system.
• It is central to a countercyclical macroprudential policy as it helps ensure financial stability throughout the cycle.
• As macroprudential authorities, we are therefore continuing to review the implementation and scope of the available instruments.

Role of the non-bank financial sector and macroprudential policy

• In my view, the regulatory framework for the non-bank financial sector is one of these areas.
• And third, work on the macroprudential framework for this sector is still in its infancy.
• While the size of the banking sector stagnated over this period, non-banks currently account for around 55% of the euro area financial sector.
• [13] The fast growth of non-banks reflects their increasing role in financing the euro area real economy.
• Whereas ten years ago, non-banks accounted for 14% of the euro area financial sectors loans to non-financial corporations, they now account for twice that share.
• By diversifying the financing sources of the real economy, the non-bank financial sector plays an important role in financial intermediation.
• Moreover, distress in the non-bank sector could spread to the banking sector as well, due to the strong links between the two.
• First and foremost, the non-bank financial sector needs to have solid prudential standards.
• We will also need an extension of the macroprudential toolkit to the non-bank financial sector, in order to provide the authorities with the means to address risks at system level.
• Such a framework should support the beneficial role that non-banks play in financial intermediation and ensure the sustainable development of non-bank financing.

Conclusions