The ECB’s Role in Financial Supervision

The European Council’s decisions to implement the De Larosiere recommendations for a reformed approach to micro-level financial supervision and a new European Systemic Risk Board (ESRB) are to be welcomed. The ECB’s central role in the ESRB is also to be welcomed. However, the limited role envisaged for the ESRB means that it may not actually help much in preventing future crises. The ESRB should be given a central role in the implementation of counter-cyclical capital ratios and in promoting (and then overseeing implementation of) other changes such as maximum leverage ratios and limits on non-core funding.Reformed European Financial Supervision

The Euro area's macroeconomic balancing act

The European Systemic Risk Board (ESRB) and the proposed prevention and correction of macroeconomic imbalances regulation (EIP) are designed to avoid imbalances. However, these instruments overlap, and need clarification. Both the ESRB and the Commission, which is given certain powers by the EIP, must identify and act early on risks. Acting in the face of strong economic and political pressure is difficult. Complementing the current approach with transparent and rules-based mechanisms will reduce this problem. The EIP and ESRB can complement each other in terms of analysis and policy, and close collaboration will be vital. The EIP regulation can be used to ensure that ESRB recommendations are followed up. In the area of financial recommendations relevent to macroeconomic imbalances, the Commission should have a more formal requirement to act on ESRB recommendations. The EIP regulation would benefit from a clause allowing recommendations to be addressed not only to member states. Conflicts between the ESRB and Commission could arise. In this case, the Treaty requires the Commission to issue a recommendation even if the ESRB issues a negative finding. Legally, it might not be possible to exclude the use by the Commission of confidential information obtained in the ESRB.

More Than One Step to Financial Stability

Visiting Scholar Garry Schinasi examines the European proposals for the creation of both a European Systemic Risk Board (ESRB) to oversee macroprudential regulation and a European System of Financial Supervision (ESFS) to strengthen microprudential supervision. He argues that structural vulnerabilities of this regulatory framework need to be addressed to ensure that the early-warning systems will be adequate to avoid future crises. Specifically, Schinasi points to the fact that the ESRB lacks binding powers to enforce regulation as well as the lack of a legislative framework to resolve the insolvency of systemically important financial institutions (SIFIs).

The new financial stability architecture in the EU

After the introduction of the euro in 1999, the debate on the financial stability architecture in the EU focused on the adequacy of a decentralised setting based on national responsibilities for preventing and managing crises. The Financial Services Action Plan in 1999 and the introduction of the Lamfalussy process for financial regulation and supervision in 2001 enhanced the decentralised arrangements by increasing significantly the level of legal harmonisation and supervisory cooperation. In addition, authorities adopted EU-wide MoUs to safeguard cross-border financial stability. In this context, the financial crisis has proved to be a major challenge to the ongoing process of European financial integration. In particular, momentous events such as the freezing of interbank markets, the loss of confidence in financial institutions, runs on banks and difficulties affecting cross-border financial groups, questioned the ability of the EU financial stability architecture to contain threats to the integrated single financial market. In particular, the crisis has demonstrated the importance of coupling to micro-prudential supervision a macro dimension aimed at a broad and effective monitoring and assessment of the potential risks covering all components of the financial system. In Europe, following the de Larosière Report, the European Commission has put forward proposals for establishing a European System of Financial Supervision and a European Systemic Risk Board, the latter body to be set up under the auspices of the ECB. While the details for the implementation of these structures still need to be spelt out, they should reinforce significantly – ten years after the introduction of the euro – the financial stability architecture at the EU level

Financial Stability, New Macro Prudential Arrangements and Shadow Banking: Regulatory Arbitrage and Stringent Basel I I I Regulations

Despite Basel III’s efforts to address capital and liquidity requirements, will the risks linked to regulatory arbitrage increase as a result of Basel III’s more stringent capital and liquidity rules? As well as Basel III reforms which are geared towards greater facilitation of financial stability on a macro prudential basis, further efforts and initiatives aimed at mitigating systemic risks – hence fostering financial stability, have been promulgated through the establishment of the De Larosiere Group, the European Systemic Risk Board, and a working group comprising of “international standard setters and authorities responsible for the translation of G20 commitments into standards.” This paper aims to investigate the impact of Basel III on shadow banking and its facilitation of regulatory arbitrage as well as consider the response of various jurisdictions and standard setting bodies to aims and initiatives aimed at improving their macro prudential frameworks. Furthermore, it will also aim to illustrate why immense work is still required at European level – as regards efforts to address systemic risks on a macro prudential basis. This being the case even though significant efforts and steps have been taken to address the macro prudential framework. In so doing, the paper will also attempt to address how coordination within the macro prudential framework – as well as between micro and macro prudential supervision could be enhanced

'Cease and desist?' The persistence of Marlboro brand imagery in racing video games

Since 1972, Philip Morris (PM) has sponsored motorsports. Racing video games are a popular genre among youth and often emulate the branding of their real-life counterparts, potentially exposing youth to tobacco imagery. We examined racing video games for the presence of Marlboro imagery and explored the history of efforts to remove or regulate such imagery.We searched the Truth Tobacco Industry documents for relevant documents and used information from video game-related websites and game play videos to identify racing video games that contained Marlboro trademarks and imagery. We also collected information on the Entertainment Software Ratings Board's (ESRB) tobacco-specific and overall game ratings.In 1989, negative publicity surrounding the presence of Marlboro logos in racing games led PM to threaten legal action against two game makers for copyright infringement. PM also launched a media campaign promoting this intervention as evidence of its commitment to youth smoking prevention. Nonetheless, we identified 219 video games from 1979 to 2018 that contained Marlboro trademarks and/or Marlboro-sponsored drivers and livery. Among the games in our sample with an ESRB game rating, all but one received an 'E,' indicating appropriateness for everyone, and all but three lacked tobacco content descriptors.Racing video games have been and continue to be a vehicle for exposing adolescents to the Marlboro brand. Because voluntary efforts by PM and the video game industry to prevent youth exposure to tobacco brands in video games have been ineffective, USA and international policy-makers should prohibit tobacco content in video games

Macroeconomic imbalances in the euro area: symptom or cause of the crisis? CEPS Policy Brief No. 266, April 2012

Lax financial conditions can foster credit booms. The global credit boom of the last decade led to large capital flows across the world, including large movements of resources from the Northern countries of the euro area towards the Southern part. Since the start of the crisis and more markedly after 2009, these flows have suddenly stopped, creating severe adjustment pressures. This paper argues that, at this point, the common monetary policy can only try to mitigate the unavoidable adjustment by maintaining overall financial stability. The challenge is to strike a delicate balance between providing liquidity for solvent institutions while keeping the overall pressure on for a rapid correction of the imbalances

From climate change to cyber-attacks: incipient financial-stability risks for the euro area. Bruegel Policy Contribution Issue n˚2 | February 2020

The European Central Bank’s November 2019 Financial Stability Review highlighted the risks to growth in an environment of global uncertainty. It also discusses sovereign-debt concerns in case interest rates increase, and risks arising from household and corporate debt. It assesses the risks from a possible overvaluation of asset prices, and evaluates risks within the banking and non-banking system, and climate risks. On the whole, the ECB report is comprehensive and covers the main risks to euro-area financial stability. However, some issues deserve more attention. • First, the assessment of risks in the housing market should be more nuanced. Current housing markets relative to those pre-crisis seem to be far less driven by mortgage credit, and the size of the construction sector has not increased. This is possibly good news for financial stability because a house price correction would transmit less into mortgage defaults and corrections to economic activity. • Second, there should be greater emphasis on changes in market expectations of interest rates, which can have substantial effects on asset prices. This could be particularly relevant if interest rate changes are not driven by real-economy developments. • Third, the financial system relies on a safe asset as a reference. We show that the supply of safe sovereign assets in the euro area has fallen dramatically, driven by deteriorating sovereign credit ratings and reduced supplies of bonds from the safest countries. More safe assets would support financial stability. • Fourth, though climate risks to financial stability must be taken seriously, risk weights on green assets should not be reduced since they still contain normal financial stability risks. Instead, risk weights for brown assets should be increased. • Fifth, the ECB does not consider cybersecurity and hybrid threats in its assessment. These threats are significant risks for financial institutions and at the more systemic level. • Policies to address financial-stability concerns include macroprudential measures. In this respect, we discover discrepancies between EU countries: countries with the same levels of house-price overvaluation have adopted very different macroprudential measures. Some countries might thus have done too much, while others have done too little. • When it comes to preventing the next recession or reducing its impact, we argue that EU policymakers need to be better prepared to use discretionary fiscal policy earlier and more forcefully, in particular because the ability of monetary authorities to react to the next cyclical downturn is very limited