Review of the EU Macroprudential Framework for the Banking Sector (ESRB Concept Note)
MARCH 05, 2022

On 31 March 2022, the ESRB published  the concept note titled Review of the EU Macroprudential Framework for the Banking Sector. This concept note discusses the main challenges to be addressed and setting out what in the ESRB’s view needs to be done to ensure that the macroprudential rules for banks remain fit for purpose and future proof.

There are seven key results of this analytical work:

  • The macroprudential toolkit contributed to resilience during the COVID-19 crisis, even though it was used unevenly across the EU.
  • Several banks, in particular systemically important ones, are not able to fully use their capital buffers, due to overlapping capital requirements. The advantages and disadvantages of potential mitigating options are discussed.
  • The experience gained by applying macroprudential provisions in the last ten years highlights the need for more consistent, forward-looking and actively countercyclical use of macroprudential instruments. A further overarching aim of reform is to reduce the complexity of the provisions, both procedurally and conceptually: this would facilitate their use by national competent authorities without weakening existing safeguards that are necessary for the integrity of the internal market.
  • The EU legal framework should be enriched by including borrower-based measures (BBMs) for residential real estate (RRE) loans in a targeted manner.
  • Activity-based tools would complement Entity-specific tools, preventing regulatory arbitrage and the transfer of risks to other parts of the system such as FinTechs and BigTechs, which appear less regulated than banks but increasingly perform similar activities.
  • Additional cyber resilience requirements for systemically important institutions should be introduced to address the systemic risk stemming from cyber risks.
  • The EU should reflect on how macroprudential policy could contribute to increasing the resilience of credit institutions to climate-related financial risks – both transitional and physical. As a growing body of analysis on climate-related risks becomes available, further adjustments to the macroprudential toolkit and new tools may be needed.