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Introductory statement

It is with great pleasure that I present this edition of the ECB Macroprudential Bulletin to you. The Macroprudential Bulletin provides insight into our ongoing work in the field of macroprudential policy, thereby contributing to greater transparency and fostering broader discussion on key macroprudential issues.

The first article studies the impact of cyclical systemic risk on future bank profitability for a large sample of EU banks, showing that high levels of cyclical systemic risk lead to large downside risks to bank profitability with a lead time of three to five years. Hence, exuberant credit and asset price dynamics tend to increase considerably the likelihood of large future bank losses. Given the tight link between bank losses and reductions in bank capital, the results presented in this article can be used to quantify the level of “Bank capital-at-risk” (BCaR) for a banking system. BCaR is a useful tool for macroprudential policy makers as it helps to quantify how much additional bank resilience could be needed if imbalances unwind and systemic risk materialises.

The second article contributes to the discussion on the interaction of different regulatory metrics by empirically examining the interaction between the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) for banks in the euro area. The findings suggest that the two liquidity requirements are complementary and constrain different types of banks in different ways, similarly to the risk-based and leverage ratio requirements in the capital framework. This dispels claims that one of the requirements is redundant and underlines the need for a faithful and consistent implementation of both measures (and the entire Basel III package more broadly) across all major jurisdictions, to maintain a level playing field at the global level and to ensure that the post-crisis regulatory framework delivers on its objectives.

The third article contributes to the ongoing discussion about the long-term strategy for stress testing in the euro area. It highlights some of the strengths and weaknesses of the constrained bottom-up approach, which is currently used in the EU-wide stress-testing exercise, and shows that under this approach banks might have some scope to underestimate their vulnerabilities. This feature warrants a thorough quality assurance by the supervisory authority. In this light, the article then presents a novel empirical analysis providing evidence that the “supervisory scrutiny” relating to the quality assurance may be having a disciplining effect on banks’ risk-taking. In particular, it finds that banks’ participation in the stress test has an attenuating effect on their risk-taking in subsequent quarters and that this effect may at least partly be due to the tighter supervisory scrutiny prompted by the stress-testing quality assurance process.

The fourth article investigates the impact of leverage on investor flows in European mutual funds. A change in the regulatory framework for Undertakings for Collective Investment in Transferable Securities (UCITS) facilitated the wider use of derivatives, increasing leverage for some bond funds. The article shows that investors in leveraged funds react more strongly to negative fund performance than investors in unleveraged funds, suggesting greater outflows for leveraged funds during these periods. Leverage in mutual funds thereby adds to procyclicality and can amplify fragilities in the sector.

The fifth article contributes to the ongoing debate on the procyclicality of initial margins (IMs) in derivative markets, and whether the current regulatory framework sufficiently addresses this issue. First, on the basis of EMIR data, it provides an overview of outstanding IMs in the euro area derivative market and identifies the most relevant sectors for their exchange. Second, using IM models in line with industry practice, it shows that aggregate IM generated by Value-at-Risk type models can potentially vary substantially over a long-term horizon. Finally, it shows that an IM floor based on a standardised IM model could be an effective tool for reducing IM procyclicality.

Finally, transparency about our ongoing work is not an end in itself. It is also an opportunity for an exchange of views. I would therefore like to invite you to share your views with us by sending an email with your feedback to The same address can also be used if you want to receive notifications of future issues of the Macroprudential Bulletin.

Luis de Guindos
Vice-President of the European Central Bank