ECB backs EC plan to consolidate macro-prudential policy

The European Central Bank has backed plans to overhaul the European macro-prudential framework, making a pitch for new and clearer powers.

The European Commission launched a consultation in August, noting the European Union's approach to macro-prudential policy had evolved in a piecemeal fashion, with some powers standardised at the union level but many others defined and used at the discretion of national supervisors.

In its consultation response today (December 12), the ECB agreed an overhaul was needed, particularly in light of the work on banking and capital markets unions. It urged clearer delineation of responsibilities between micro- and macro-prudential authorities, and new tools for itself and other institutions.

The review offers the opportunity to create a "single macro-prudential toolkit", said the ECB, replacing the current system where powers are "scattered across" the capital requirements regulation (CRR) and directive (CRD IV).

In particular, the ECB said borrower-based instruments, such as maximum loan-to-value or debt-service-to-income ratios should be added to the toolkit. It also suggested elements of Basel III, namely the net stable funding ratio and leverage ratio, should be made into macro-prudential tools that can be varied over time.

The central bank also urged the commission to expand the scope of the macro-prudential tools "beyond banking". It warned: "The significant growth of the asset management sector and the growing relevance of market-based finance increase the likelihood of systemic risks originating or extending beyond the banking sector."

Derivatives markets, securities financing transactions and asset managers are important areas that would benefit from macro-prudential oversight and tools, the ECB said. For some, such as asset managers, tools already exist in legislation and should be "made operational".

Legal recognition

As well as powers spread across national authorities, the ECB said it should be legally recognised as a macro-prudential competent authority. It said it should be clearly assigned the power to identify systemic institutions, in addition to national authorities, and it should have clear powers to impose higher capital requirements on firms that are not necessarily designated as systemic by national authorities.

The ECB said the commission should abolish the current "pecking order" of macro-prudential tools in favour of applying whichever tool is most applicable in a given situation, and should extend reciprocity arrangements to prevent regulatory arbitrage.

It added there should be a review of the macro-prudential framework at least every three years, rather than the "one-off exercise" envisaged by the CRR/CRD IV.