Financial Stability
Macroprudential Supervision and Surveillance
Mirko Mallia
Assistant Executive
Financial Stability Surveillance,
Assessment and Data
17 April 2012
Macroprudential Supervision and Surveillance
Disclaimer: Any views expressed are only the author’s own
and do not necessarily reflect the views of the CBM or the
Eurosystem
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Outline of the Presentation
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What is Financial Stability
•
Response to the financial crisis
•
Macroprudential Supervision
•
The European Systemic Risk Board (ESRB)
•
The Surveillance Function
•
Conclusions
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What is financial stability?
The Central Bank of Malta defines financial stability as:
‘a condition where the financial system – comprising institutions,
markets and infrastructures – is able to: allocate savings to
investment opportunities efficiently; ensure the rapid settlement
of payments; effectively manage potential risks that may harm its
performance; and absorb shocks without impairing its operations’.
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Sources of risks to financial stability
The IMF (IMF/WP/04/101)distinguishes between Endogenous
and Exogenous Risks
Endogenous
Exogenous
•Institutions
based - financial,
operational, legal, reputation,
business strategy
•Macroeconomic
•Markets
•Event
based - counterparty,
asset price misalignment,
contagion.
•Infrastructure
based - payment
and settlement systems, legal,
regulatory
disturbances
– economic environment risks
(such as oil prices),
risks – natural disasters,
political events, (e.g. natural
disasters, pandemics, large
bankruptcies)
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Why is financial stability promoted?
A stable financial system:
• is a key ingredient for a healthy and successful economy
(promoting economic growth).
• Fosters liquidity in the banking system;
• It enhances the efficiency of the Payment and
Settlement Systems;
• Conducive to the effective implementation of monetary
policy
People need to have confidence that the system is safe
and stable.
Important that problems in particular areas do not lead to
disruptions across financial system (contagion)
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Response to the Financial Crisis
•
Since 2007 there has been a global trend towards
developing a new financial regulatory and supervisory
framework.
•
At EU level, the Commission mandated a high Level
Group to put forward recommendations on how to
strengthen the European Supervisory Framework (The
DeLarosiere Report).
•
This Report recommended the establishment of a new
European Supervisory Framework – Two pillars
microprudential and macroprudential.
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The new EU supervisory architecture
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Macroprudential Supervision before the crisis
•
However Macroprudential Supervision is not a new
concept. In fact, this concept existed much prior to the
emergence of the crisis in 2007
•
Prior to the crisis, regulators were influenced by the
market exuberance and to some extent kept “a blind
eye” to the indicators of the crisis
• “If we had relied on effective macroprudential oversight and policy
instruments back then, one can argue that the social and economic
costs of the crisis would have been much lower”.Jurgen Stark
(former member of the ECB Executive Board)
Macroprudential Supervision
•
The broad goal of macroprudential policy is to limit
systemic risk – the risk of financial system disruptions
that can destabilise the macroeconomy (BIS)
•
In detail systemic risk can be defined as financial
system volatility, resulting in potentially disastrous
consequences or aggravated by unconventional events
in or between financial intermediaries within the
economy.
•
Examples of systemic trigger events Lehman Brothers,
Northern Rock, Greece Sovereign debt problems
International Macroprudential Bodies
•
As at end 2010 ESRB was established (EU Regulations
No 1092/2010 and No 1096/2010)
•
Apart from the ESRB at a global level two other main
macroprudential bodies include.
Financial Policy Committee in the UK
Financial Stability Oversight Council in the USA
•
The broad objectives of these institutions is to monitor
and assess systemic risk in normal times with the aim
of mitigating exposure of the system to risk of failure
and enhancing the financial system’s resilience to
shocks.
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ESRB Main Tasks
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Determining and/or collecting and analysing all the
relevant and necessary information
identifying and prioritising systemic risks
issuing warnings
issuing recommendations for remedial action in
response to the risks identified and, where appropriate,
making those recommendations public
monitoring the follow-up to warnings and
recommendations
cooperating closely with all the other parties to the
European System of Financial Supervision (ESFS)
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ESRB Press releases and Recommendations
•
Recommendation of the ESRB of 21 September 2011 on
lending in foreign currencies (ESRB/2011/1), OJ C 342
•
Recommendation of the ESRB of 22 December 2011 on
US dollar denominated funding of credit institutions
(ESRB/2011/2), OJ 2012/C 72/01
•
Recommendation of the ESRB of 22 December 2011 on
the macroprudential mandate of national authorities
(ESRB/2011/3), OJ 2012/C 41/01.
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Surveillance vs. Assessment Function
Systemic risk analysis can be broken down into two core
components: i) surveillance (risk identification) and ii) risk
assessment
•
Financial stability
surveillance is all about
risk detection (financial
vulnerabilities) which
could lead to a disruption
or failure of the financial
system or in extreme
circumstance to a
financial crisis
•
Risk assessment relates
to the evaluation of the
relevance and potential
severity of each risk
identified as material in
the surveillance phase
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Surveillance Function
•
Risk monitoring should concentrate on both financial
system risks and also risks emanating form the
macroeconomic environment and non-financial related
events
•
Monitoring of such risks involves the aggregation of a
large quantity of data as well as constant work on market
intelligence
•
Also various financial stability indicators should be
computed.
•
N.B. Data/indicators should be regularly monitored and
revised
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Surveillance Function
According to E Philip Davis (BOE) in advance of crises a
number of specific traits are generally observed
• Unanticipated regime shifts towards laxity on the part of monetary,
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fiscal or regulatory authorities
Debt accumulation (economy-wide, by individual sectors or in
individual markets)
Asset price booms (in either property or equity prices)
Concentration of risk on the part of financial institutions (implying
excessive optimism in respect of potential “correlations”)
New entry of intermediaries to the relevant market
Financial innovation (and rapid growth of the markets concerned)
Declining capital adequacy of financial institutions
And finally, monetary tightening or unanticipated regime shifts
towards rigour on the part of monetary, fiscal and regulatory
authorities.
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Financial Stability Surveillance Indicators
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Macroeconomic risks: GDP Actual/Forecast,
Unemployment rate
•
Credit risk: Household and Corporates debt to GDP ,
LTV ratio, debt to disposable Income, Property prices,
government deficits, sovereign spreads, financial
leverage
•
Market risk: equity index (both local and global indices),
private sector loans, Changes in credit standards for
corporates and Household loans
•
Liquidity risk : customers loans-to-deposits ratio, banks’
ratio of short-term funding to loans
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Conclusion
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Without doubt Countries should safeguard financial stability
(particularly from experience of the financial crisis)
Although macroprudential supervision is not a new concept,
it is gathering more prominence
This has brought the creation of new bodies internationally
with the primary aim to monitor and analyse systemic risk and consequently avoid a repeat of the crisis.
Consequently, throughout the world a “new” surveillance
task has been adopted.
The main challenge is to process a wide range of
information, in such a way as to increase the resilience of
the financial sector or at least to mitigate as much as
possible the repercussions to the economy.
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Thank you
Questions?
Contact details:
malliam@centralbankmalta.org