Blog Post

Fledgling referee of systemic risk

Following the recommendations of the de Larosière report of February 2009, the EU put in place a new European System of Financial Supervision (ESFS). It has been fully operational since January this year and consists of the European Systemic Risk Board (ESRB) and three European Supervisory Authorities (ESAs). Together they should address the shortcomings in […]

By: Date: July 10, 2011 Topic: Macroeconomic policy

Following the recommendations of the de Larosière report of February 2009, the EU put in place a new European System of Financial Supervision (ESFS). It has been fully operational since January this year and consists of the European Systemic Risk Board (ESRB) and three European Supervisory Authorities (ESAs). Together they should address the shortcomings in supervision that were revealed by the financial crisis.

The ESRB is located in Frankfurt and is responsible for the macroprudential oversight of the financial system of the 27 EU member states so as to prevent or mitigate systemic risk and distress. Its warnings and recommendations will be issued to the EU and member states, as well as national and European super-visors, whenever it sees a risk to financial stability. The follow-up to recommendations is based on a simple comply-or-explain principle; apart from the publication of warnings and recommendations, no sanctions are foreseen. The ESRB will report to the Council of the European Union and the European Parliament annually and is held accountable by the  Parliament.

The ESRB consists of five bodies. The General Board is the decision-making authority and meets at least four times a year. The chair of the General Board is the president of the ECB (at least for the first five years). The first vice-chair would typically be from a non- euro -area member state and is currently Sir Mervyn King, governor of the Bank of England. Overall, the General Board has 66 members, of which 37 have voting rights, with national central bank governors constituting the largest group.

The Steering Committee consists of a smaller group of members of the General Board and carries out preparatory work to aid the board’s decision-making process. The Advisory Scientific Committee brings together 15 independent experts with different skills and experience. It provides advice and assistance on issues relevant to the work of the ESRB and is chaired by Martin Hellwig. The Advisory Technical Committee is an advisory and assistance body, which is composed of  delegates from the institutions represented on the General Board and will have 62 members. Its chair is Stefan Ingves, governor of the Swedish central bank. The Secretariat is responsible for the day-to-day running of the ESRB and is located at the ECB.

It remains to be seen how the different bodies that make up the ESRB will interact with each other. Clearly, the Steering Committee will play a key role in preparing the policy discussion for the General Board. While the board is the final decision-making body, it appears unlikely that in-depth policy discussions in such a large forum will be feasible. Similarly, the Advisory Technical Committee would like to play a key role but its size will render effective discussions difficult.

It is likely that the Steering Committee will be the key body of the ESRB. The power of European institutions in this committee is significant. Here, the challenge will be to foster agreements to which the General Board will subscribe. Clearly, in the board the balance of power is tilted more towards the national representatives, even though all members are expected to act impartially and solely in the interest of the Union.  

The Scientific Advisory council will also play an important role as it will bring in independent and unbiased external expertise. Especially in the foundation phase, it could play a crucial role by influencing the direction of the ESRB’s work.

Thematically, the ESRB is still in the process of defining its role clearly and significant pressure exists to keep its mandate limited.

In this regard, first, the European Banking Authority will play a vital role for bank-level supervision. It appears that the ESRB does not intend to venture into the microprudential field and it remains to be seen to what extent the ESRB will issue warnings and recommendations to systemically important financial institutions.

Second, the ESRB will avoid venturing too greatly into the area of macroeconomic developments, where conflicts of interest with the ECB and the national central banks of non-euro-area member states could arise.

A further line of conflict could arise between the ESRB and the European Commission’s new surveillance procedure to address macro-economic imbalances.

Clearly, macroeconomic imbalances often are of major relevance for the stability of the financial system. Both the Commission and the ESRB may, therefore, wish to issue recommendations – on real estate bubbles, for instance.

Overall, the ESRB could play a leading role in the financial stability discussions of the EU but it will be important to take up difficult topics forcefully early on. For example, it could establish itself now by preparing policy options for decision-makers on how to deal with sovereign risk.

A version of this op-ed has been published in Financial World.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More by this author
 

Opinion

European governance

Can the EU fiscal rules jump on the green bandwagon?

By and large, setting a new green golden rule would be a useful addition to the existing EU fiscal framework.

By: Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: October 22, 2021
Read article
 

Blog Post

European governance

Germany’s post-pandemic current account surplus

The pandemic has increased the net lending position of the German corporate sector. By incentivising private investment, policymakers could trigger a virtuous cycle of increasing wages, decreasing corporate net lending, which would eventually lead to a reduction of the economy-wide current account surplus.

By: Lionel Guetta-Jeanrenaud and Guntram B. Wolff Topic: European governance, Macroeconomic policy Date: October 21, 2021
Read about event
 

Past Event

Past Event

Monetary policy in the time of climate change

How does climate change influence monetary policy in the eurozone? What potential monetary policy measures should be taken up to address climate risks?

Speakers: Cornelia Holthausen, Jean Pisani-Ferry and Guntram B. Wolff Topic: Green economy, Macroeconomic policy Date: October 20, 2021
Read article More by this author
 

Podcast

Podcast

Rethinking fiscal policy

A look at the past, present and future of fiscal policy in the European Union with Chief economist of the European Stability Mechanism, Rolf Strauch.

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: October 20, 2021
Read about event More on this topic
 

Upcoming Event

Nov
4
14:00

European monetary policy: lessons from the past two decades

This event will feature the presentation of “Monetary Policy in Times of Crisis – A Tale of Two Decades of the European Central Bank."

Speakers: Grégory Claeys and Wolfgang Lemke Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article
 

External Publication

European Parliament

Tailoring prudential policy to bank size: the application of proportionality in the US and euro area

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Alexander Lehmann and Nicolas Véron Topic: Banking and capital markets, European Parliament, Macroeconomic policy Date: October 14, 2021
Read article More by this author
 

External Publication

Global Economic Resilience: Building Forward Better

A roadmap for systemic economic reform calling for step-change in global economic governance to increase resilience and build forward better from economic shocks, prepared for the G7 Advisory Panel on Economic Resilience.

By: Thomas Wieser Topic: Global economy and trade, Macroeconomic policy Date: October 14, 2021
Read article More on this topic More by this author
 

Opinion

Letter: Declining investment may explain why rates are low

Perhaps an analysis of the causes of the declining investment rate would bring us closer to explaining why real interest rates are so low.

By: Marek Dabrowski Topic: Macroeconomic policy Date: October 1, 2021
Read article More by this author
 

Podcast

Podcast

A green fiscal pact

How can the European Union increase green public investment while consolidating budget deficits?

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: September 29, 2021
Read article More on this topic More by this author
 

Blog Post

Monetary arithmetic and inflation risk

Between 2007 and 2020, the balance sheets of the European Central Bank, the Bank of Japan, and the Fed have all increased about sevenfold. But inflation stayed low throughout the 2010s. This was possible due to decreasing money velocity and the money multiplier. However, a continuation of asset purchasing programs by central banks involves the risk of higher inflation and fiscal dominance.

By: Marek Dabrowski Topic: Macroeconomic policy Date: September 28, 2021
Read article More on this topic More by this author
 

Opinion

The pandemic’s uncertain impact on productivity

The pandemic has certainly permanently affected our way of working. Whether this is for the better remains to be seen.

By: Maria Demertzis Topic: Macroeconomic policy Date: September 28, 2021
Read about event More on this topic
 

Past Event

Past Event

How to strike the right balance between the three pillars of the pension system?

In this event panelists will discuss the future of European pension schemes.

Speakers: Elsa Fornero, Svend E. Hougaard Jensen and Suvi-Anne Siimes Topic: Macroeconomic policy Date: September 23, 2021
Load more posts