The European Systemic Risk Board – governance and early experience

ABSTRACT

The European Systemic Risk Board is charged with the macroprudential oversight of the financial system in the European Union. We compare and contrast the ESRB with the U.S. National Transportation Safety Board, which some scholars proposed as a role model for systemic risk management. There are parallels and some differences between these organisations. Neither institution has direct regulatory power, which could paradoxically be beneficial as it may help preserve their independence and objectivity in the long run. We also review the ESRB’s activities after it started in 2010 and assess the effect of its first public recommendation.

KEYWORDS:

• European Systemic Risk Board
• macroprudential policy
• systemic risk management; financial governance
• foreign-currency lending

JEL CLASSIFICATION:

• G01
• G28
• G38
• E58

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Edge and Liang (2019) collect and analyse a dataset of the macro-prudential policy institutions of 58 countries. They note a strong growth of multi-agency financial stability committees (FSCs) between 2008 and 2018. They show that there are FSCs in 47 of the 58 countries in 2018. Of the FSCs in these 47 countries, 34 have merely soft powers, suggesting an information exchange and/or coordinating roles. The 13 other FSCs have, like the ESRB, the ability to issue “comply or explain” warnings and recommendations (10 countries), or the “hard power” to impose change directly (for example by issuing binding warnings and recommendations (3 countries)).

2. What follows is a brief overview. For a more extensive overview of EU macroprudential policy, see, e.g., Acharya and Calomiris (2014). International comparisons of macroprudential governance are conducted in De Haan, Houben, and van der Molen (2012), Jenkins and Longworth (2015) and Edge and Liang (2019). For information on the Financial Stability Oversight Council (FSOC), which is in charge of identifying and monitoring systemic risks in the United States, see e.g. Benoit et al. (2017).

3. For more detail on the ESRB structure, see its Annual Report (ESRB 2018) and https://www.esrb.europa.eu/home/html/index.en.html.

4. The other seven voting members are the President and Vice President of the ECB, a representative of the European Commission, the Chair of the Advisory Technical Committee, and the Chair and the two Vice-Chairs of the Advisory Scientific Committee.

5. This is an interesting difference between the ESRB and the Basel Committee on Banking Supervision (BCBS), which has established the framework to identify Systematically Important Financial Institutions, see Benoit, Hurlin, and Pérignon (2019). In contrast to the ESRB, the BCBS regularly invites industry members during the meetings of the Macroprudential Supervision Group.

6. A national macroprudential authority that activates a particular measure can make a request through the ESRB that this measure be applied by the other EU countries too. The ESRB would then consider issuing a recommendation to reciprocate. One argument for reciprocity is to preserve a level playing field between countries.

7. Latvia and Lithuania actually had the highest level of foreign currency lending at the time of the recommendation. But foreign currency lending there was predominantly in euros, which became the domestic currency when these countries joined the euro area in 2014 and 2015, respectively.