The ESRB issues recommendations on the macro-prudential mandate of national authorities and on US dollar denominated funding and liquidity risk

Date 17/01/2012

Recommendation on the macro-prudential mandate of national authorities

The ESRB’s first recommendation is aimed at creating effective macro-prudential policy in the EU as a whole. The ESRB is able to issue warnings and recommendations, but it is the member states that decide on measures and implement them. Clear national mandates for macro-prudential policy are thus vital. The ESRB recommends member states that the objective for macro-prudential policy should be to contribute to the safeguard of the stability of the financial system as a whole, including by strengthening the resilience of the financial system and decreasing the build-up of systemic risks.

As regards organisation, the ESRB recommends that a single institution or a board should be responsible for national macro-prudential policy, and that this body should have control over appropriate instruments for achieving its objectives. It should be ensured that macro-prudential policy can be pursued either upon the initiative of the national macro-prudential authority or as a follow-up to warnings or recommendations from the ESRB. In addition, the ESRB recommends that the macro-prudential body should be operationally independent and accountable to the national parliament.

“Many EU countries are currently establishing structures and regulations for macro-prudential policy. In Sweden, the Financial Crisis Commission has the task of proposing how macro-prudential policy should be organised. So this guidance from the ESRB is welcome,” comments Stefan Ingves.

Recommendation on US dollar denominated funding and liquidity risk

The ESRB’s second recommendation is aimed at preventing the European banks’ dependency on funding in US dollars from leading to a crisis situation like that following the collapse of Lehman Brothers in 2008 and the European financial difficulties in 2011. The ESRB therefore recommends the national supervisory authorities to take the preventive measures of monitoring maturity mismatches between assets and liabilities in US dollars and ensuring that the banks have sustainable contingency plans for their funding in US dollars.

“The ESRB’s recommendation corresponds well with the Riksbank’s view. In the last two Financial Stability Reports, we have pointed out the risks inherent in the major Swedish banks’ liquidity risk in US dollars. This maturity mismatch between assets and liabilities in dollars constitutes a risk to the Swedish financial system”, says Stefan Ingves.

Link to the recommendations and the ESRB’s website.