European Systemic Risk Board Final Report and Opinion on Use of Structural Macroprudential Instruments in the EU

The European Systemic Risk Board has published a final report setting out proposed amendments to the ESRB Handbook on Operationalising Macroprudential Policy and policy proposals on the legal framework of the systemic risk buffer and the structural buffers for global systemically important institutions (G-SIIs) and O-SIIs. Alongside the final report, the ESRB has also published an Opinion to the European Commission on structural macroprudential buffers.

O-SIIs are institutions that fall short of classification as G-SIIs, but whose failure would have a significant negative effect on the financial system, either at EU level or at the level of an EU Member State. Institutions identified as O-SIIs attract stricter regulatory treatment under the Capital Requirements Directive and Capital Requirements Regulation, in particular being subject to the "O-SII buffer", an institution-specific buffer which focuses on reducing the institution's probability of default.

The ESRB’s final report has been prepared by the Expert Group of the ESRB’s Instruments Working Group, which has analyzed the use of the macroprudential buffers in the EU over the past three years. The final report sets out the results of a stock-take of the use of the buffers and an evaluation of their effectiveness and efficiency and how the buffers interact. It then goes on to examine the macro-economic impact of the structural buffers and the cyclical buffers (namely, system-wide capital requirements and the counter-cyclical buffer) and how structural and cyclical buffers interact. Finally, it sets out the ERSB’s recommendations on guiding principles that could be used for the application of the O-SII and systemic risk buffers and on interaction between the buffers.

The ESRB has a mandate under CRDIV and the CRR to adopt Opinions on the appropriateness of certain macroprudential policy measures before their adoption by EU Member States or the European Central Bank. Alongside the final report, the ESRB has also published an Opinion to the European Commission on structural macroprudential buffers, which builds on the response it provided in October 2016 to a European Commission consultation on the review of the macroprudential policy framework. The Opinion reaffirms the ESRB’s view that the CRDIV/CRR legislation provides the essential elements for a sound EU macroprudential framework, but the ESRB makes a number of proposals to enhance the macroprudential toolkit.

The ESRB notes in the Opinion that there is no current consensus on the optimal level of capital requirements and has regard to a recent G20 statement recommending that further significant increases in bank capital requirements should be avoided. Accordingly, the proposals focus on improving the flexibility and transparency of how the structural buffers are applied, rather than on increasing their level.

In relation to the O-SII buffers, the ESRB proposes: (i) an increase in the O-SII buffer cap; (ii) a substantial increase in the additional O-SII buffer cap for subsidiaries; and (iii) an ESRB recommendation providing additional guidance for the calibration of the O-SII buffer, including the scope of the buffer’s application.

With regard to the systemic risk buffer (the SRB), the ESRB proposes that mandatory sequencing for its activation (known as the “pecking order”) be abolished and the SRB be upgraded to the status of a dedicated instrument to address system-wide structural systemic risks not covered by the CRR. The ESRB also proposes adapting the framework to: enable national regulators (or other designated authorities) to use the SRB to target specific sources of risk; limit the application of the SRB to risks stemming from the systemic importance of individual institutions; and simplify and clarify the notification and approval procedure.

As regards the interaction between the structural buffers, the ESRB notes that the current CRDIV “accumulation rule” means that, if applied on a consolidated basis, only the higher of the G-SII buffer, O-SII buffer and the SRB is currently applicable to an institution. The ESRB considers that, instead, capital requirements related to measures that target different systemic risks should be cumulative. Measures targeting different risks should be accumulated, but – to avoid the double counting of risks – measures targeting the same risks should not.

The ESRB does not expect that adoption of its proposals would lead to significant impact on existing capital requirements for credit institutions.

View the final report.

View the Opinion.

View the ESRB Handbook on Operationalising Macroprudential Policy.

View the European Consultation on review of the EU macroprudential framework.

View the ESRB response to the European Commission consultation.