Macroprudential Bulletin

The aim of the ECB Macroprudential Bulletin is to raise awareness of macroprudential policy issues in the euro area by bringing greater transparency to the ECB's ongoing work and thinking in this field. The current edition of this biannual publication looks at analytical work and regulatory issues relating to macroprudential policy.

MACROPRUDENTIAL
BULLETIN
March 2019 - Issue 7

Introductory statement by Luis de Guindos

Luis de Guindos, Vice-President of the ECB, presents the findings of the articles in the latest issue of the Macroprudential Bulletin.

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An assessment of bank regulatory reforms ten years after the global financial crisis

The ability of the banking system to absorb losses while minimising costs to taxpayers increased up to twelvefold between 2007 and 2017. This is due to a reduction in the average default probability of banks to a third of its pre-crisis level, an increase in loss-absorbing liabilities owing to the bail-in tool and larger capital buffers, and the introduction of the Single Resolution Fund.

How resilient are European banks? Results from the new macroprudential stress test framework

This article summarises the results of the macroprudential stress test of the euro area banking sector in 2018-2020 and assesses the resilience of the European banking sector’s resilience, if faced with a global economic recession. It looks at the banking system as a whole and incorporates interdependencies between banks and the real economy.

Macroprudential analysis of residential real estate markets

This article presents the ECB framework for assessing financial stability risks stemming from residential real estate markets and for designing macroprudential policy responses. It reviews recent developments in residential real estate markets and policy initiatives to address risks.

Analysing recent decisions on the countercyclical capital buffer in SSM countries

A few EU countries announced a positive countercyclical capital buffer rate (CCyB) in 2018. This article looks at national CCyB frameworks and provides insights into the decision-making processes which are based on ‘guided discretion‘. This helps to identify best practices and country specificities, providing factors which would help consistently apply macroprudential requirements to the identified risk exposures.

Macroprudential policy measures

This document provides an overview of the macroprudential policy measures that are being implemented in euro area countries as of 1 January 2019.

Previous releases
No. 7
27 March 2019
Macroprudential Bulletin - Introductory statement by Luis de Guindos
No. 7
27 March 2019
Is taxpayers’ money better protected now? An assessment of banking regulatory reforms ten years after the global financial crisis

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This study analyses whether the ability of the euro area banking system to withstand potential shocks while minimising taxpayers’ costs has changed in the ten years since the financial crisis as a consequence of the impact of post-crisis reforms on bank capital and loss-absorbing capacity. The results show that the average probability of default of banks decreased from 3.5% in 2007 to 1.1% in 2017, less than a third of its pre-crisis value. In addition, under conservative assumptions on the scope of liabilities affected by the bail-in tool, banks’ loss-absorbing capacity has increased from 7.2% to 12.0% of total assets owing to the introduction of larger capital buffers and the new resolution framework, which enhances banks’ loss-absorbing capacity via the bail-in tool. Finally, the potential intervention of the Single Resolution Fund has further increased the loss-absorbing capacity of the system to 16.9% of total assets. Considering all these three factors, the ability of the banking system to absorb losses while minimising costs to taxpayers has increased more than 3-fold over the last ten years. When considering a broader scope for the bail-in tool, the system’s loss-absorbing capacity has increased to 55.5% of total assets, which corresponds to an overall 12-fold increase in its ability to absorb losses while minimising taxpayers’ costs.

No. 7
27 March 2019
A bird’s-eye view of the resilience of the European banking system: results from the new macroprudential stress test framework

Abstract

JEL Classification

E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

The macroprudential stress test of the euro area banking system examines the effects of the baseline and adverse scenarios on the 91 largest euro area credit institutions across 19 countries. The analysis looks at the financial system as a whole and acknowledges the interdependencies between banks and the real economy. In particular, it takes into account banks’ reaction to changing economic conditions and to deterioration in their balance sheets. The results indicate substantial resilience of the euro area banking system at the current juncture. The macroprudential stress test predicts a lower negative impact on capital ratios, though higher capital depletion, in billions of euro, than a static balance-sheet stress test. It also shows that banks’ deleveraging tied to deteriorating capitalisation and asset quality leads to further deterioration in economic conditions in an adverse scenario.

No. 7
27 March 2019
Macroprudential analysis of residential real estate markets

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

R30 : Urban, Rural, Regional, Real Estate, and Transportation Economics→Real Estate Markets, Spatial Production Analysis, and Firm Location→General

Abstract

This article presents the ECB framework for assessing financial stability risks stemming from residential real estate markets and for designing macroprudential policy responses. It reviews recent developments in residential real estate markets and policy initiatives to address risks.

No. 7
27 March 2019
Shelter from the storm: recent countercyclical capital buffer (CCyB) decisions

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission

Abstract

When living by the ocean, instead of trying to calm the waves and tides, building a levee or a breakwater is the safest option. This article reviews the country-specific strategic choices and decisions regarding timing and calibration of the countercyclical capital buffer (CCyB) in countries participating in the Single Supervisory Mechanism (SSM). It identifies commonalities across countries and country specificities that influence decisions by national designated authorities. In so doing, it summarises the limitations encountered with the credit-to-GDP gap and the role of other indicators and factors in calibrating the appropriate CCyB rate on the basis of “guided discretion”. Ultimately, assessing risks across euro area countries consistently, while taking into account country-specific factors, supports the effective use of the CCyB as a macroprudential instrument and ensures that similar risk exposures are subject to the same set of macroprudential requirements.

No. 7
27 March 2019
Macroprudential policy measures
No. 6
2 October 2018
Macroprudential Bulletin - Introductory statement
No. 6
2 October 2018
The implications of removing repo assets from the leverage ratio

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This article summarises the key findings from a counterfactual exercise where the effect of removing repo assets from the leverage ratio on banks’ default probabilities is considered. The findings suggest that granting such an exemption may have adverse effects on the stability of the financial system, even when measures are introduced to compensate for the decline in capital required by the leverage ratio framework. Increases in probabilities of default are mainly seen for larger banks which are more active in the repo market. Moreover, it is observed that the predictive power of the model improves when repo assets are included. Overall, the analysis in this article does not support a more lenient treatment of repo assets in the leverage ratio framework, e.g. by exempting them or allowing for more netting with repo liabilities or against high-quality government bonds.

No. 6
2 October 2018
Does the G-SIB framework incentivise window-dressing behaviour? Evidence of G-SIBs and reporting banks

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

G38 : Financial Economics→Corporate Finance and Governance→Government Policy and Regulation

Abstract

This article evaluates whether the global systemically important bank (G-SIB) framework has incentivised banks to adopt window-dressing behaviour, and whether their engagement in capital market activities has facilitated it. Window-dressing behaviour could have detrimental effects on financial stability, for at least two reasons: first, it may imply an underestimation of banks’ overall systemic importance and a distortion of the relative ranking in favour of banks that engage in more window-dressing behaviour; second, overall market functioning may be adversely affected if banks reduce the provision of certain services towards the end of the year. The evidence presented in this article suggests that both G-SIBs and banks with reporting obligations have reduced their overall risk score and some of their individual risk indicators at the end of a calendar year, both in absolute terms and relative to the other banks in the sample. The results also indicate that year-end reductions in capital market activities are a main driver of the observed window-dressing behaviour.

No. 6
2 October 2018
Macroprudential liquidity tools for investment funds - A preliminary discussion

Abstract

JEL Classification

G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination

Abstract

This article aims to facilitate discussion on potential macroprudential tools for investment funds. To this end, the article puts forward an initial assessment based on the application of a conceptual framework and aims to inform the debate on the potential design aspects of macroprudential liquidity tools. In line with the ESRB’s approach to developing macroprudential instruments, the effectiveness and efficiency of various macroprudential liquidity tools for investment funds are thoroughly assessed. The article provides an overview of the various liquidity tools and assesses the suitability of these tools for containing the materialisation of systemic risks through various channels.

No. 6
2 October 2018
Macroprudential policy measures
No. 5
30 April 2018
Macroprudential Bulletin - Interview with Vítor Constâncio
No. 5
30 April 2018
Using large exposure data to gauge the systemic importance of SSM significant institutions

Abstract

JEL Classification

C63 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Computational Techniques, Simulation Modeling

G01 : Financial Economics→General→Financial Crises

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This article presents stylised facts from the euro area network of large exposures and derives model-based interconnectedness measures of SSM significant institutions. The article has three main findings. First, the interbank network is relatively sparse and suggests a core-periphery network structure. Second, the more complex network measures on average correlate highly with the more simple size-based interconnectedness indicators, constructed following the EBA guidelines on the calibration of O-SII buffers. Third, there is nevertheless value for policymakers to take into account network-based measures in addition to the size-based interconnectedness indicators, as for some individual banks those measures can deviate considerably.

No. 5
30 April 2018
How competition and regulation drive bank and investment fund risk profiles and their market shares

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

The rapid growth of the asset management sector over recent years has raised questions about the interaction between traditional banks and investment funds, as well as the drivers behind this trend. Our analysis contributes to this debate by shedding light on the implications of increased competition between the two sectors. We first examine how competition between banks and investment funds drives the risk profiles and market shares of these two sectors. In a second step, we assess whether and how capital requirements for banks influence the relative market shares of the two sectors, contributing to both the analysis of the drivers behind the structural developments in the euro area financial sector and the work on the evaluation of the impact of post-crisis reforms.

No. 5
30 April 2018
Targeted review of the macroprudential framework

Abstract

JEL Classification

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

The European Commission’s proposals for the reform of EU banking rules aim to complete the post-crisis reform agenda and to address shortcomings in the current regulatory framework, notably in the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD IV). Once implemented, the changes will strengthen the regulatory architecture in the European Union, thereby contributing to the reduction of risks in the banking sector and paving the way for commensurate progress in completing the banking union. This article outlines and explains the ECB’s key messages concerning these proposals that are of particular importance for macroprudential regulation and policy. In particular, the ECB considers that the ongoing discussions on the CRR/CRD IV package provide the opportunity to make targeted changes to the macroprudential toolkit to make it more efficient and consistent. In the medium term, a comprehensive review of the macroprudential toolkit is still necessary to streamline procedures within the framework and to complement it with tools to address risks in the real estate and non-banking sectors.

No. 5
30 April 2018
Macroprudential policy measures
No. 4
19 December 2017
Macroprudential Bulletin, Issue 4, December 2017
No. 3
9 June 2017
Macroprudential Bulletin, Issue 3, June 2017
No. 2
25 October 2016
Macroprudential Bulletin, Issue 2, October 2016
No. 1
23 March 2016
Macroprudential Bulletin, Issue 1, March 2016