ESRB on the selection of instruments for macro-prudential policy
Date
20/06/2013
The ESRB – the European body for macro-prudential policy – has issued a recommendation on intermediate objectives and instruments for macro-prudential policy in EU countries. The aim is to assist the EU countries in developing an appropriate toolbox to prevent or mitigate risks to the stability of the financial system. "Macro-prudential policy is gradually developing into an increasingly distinct policy area and this recommendation marks an important step in this direction," says the Governor of the Riksbank, Stefan Ingves.
The ESRB recommends the macro-prudential authorities in the EU countries to introduce five so-called intermediate objectives for macro-prudential policy (see the table below). The authorities should also assess whether there are specific risks in their own countries or in the EU that call for the formulation of additional intermediate objectives.
In addition, the EU countries are recommended to assess whether they currently have sufficient macro-prudential instruments in place to reach the objectives set. If this is not the case then they should introduce more instruments. The EU countries are recommended to have at least one instrument for each intermediate objective. The ESRB has presented an indicative list of 15 instruments (see the table), but other instruments may also be selected.
Finally, the macro-prudential authorities are recommended to design a policy strategy that links together the ultimate objective, intermediate objectives, instruments and indicators. The Member States should respond to the main part of the recommendation in December 2014.
"Given the high level of financial integration in the EU it is important that the EU countries cooperate and reach consensus in this field. The recommendation on intermediate objectives and instruments for macro-prudential policy is therefore very welcome," says Governor Stefan Ingves.
This is the second recommendation from the ESRB concerning the design of the regulatory framework for macro-prudential policy in the EU countries. The first, which was issued last year, focused on the organisational structure for macro-prudential policy. It recommended, among other things, that responsibility for macro-prudential policy should lie with one authority, either a single institution or a board.
Intermediate objectives
Instruments
Mitigate and prevent excessive credit growth and leverage
• Counter-cyclical capital buffer
Mitigate and prevent excessive maturity mismatch and market illiquidity
• Macro-prudential adjustment to liquidity ratio (e.g. Liquidity Coverage Ratio)
Limit direct and indirect exposure concentration
• Large exposures restrictions
Limit the systemic impact of misaligned incentives with a view to reducing moral hazard
• SIFI capital surcharges
Strengthen the resilience of financial infrastructures
• Margin and haircut requirements on CCP clearing
