RECOMMENDATION OF THE EUROPEAN SYSTEMIC RISK BOARD
of 4 April 2013
on intermediate objectives and instruments of macro-prudential policy
(ESRB/2013/1)
SECTION 1
RECOMMENDATIONS
Recommendation A —
Definition of intermediate objectives
Recommendation B —
Selection of macro-prudential instruments
Table 1
Indicative list of macro-prudential instruments
1.
Mitigate and prevent excessive credit growth and leverage
2.
Mitigate and prevent excessive maturity mismatch and market illiquidity
3.
Limit direct and indirect exposure concentration
4.
Limit the systemic impact of misaligned incentives with a view to reducing moral hazard
5.
Strengthen the resilience of financial infrastructures
Recommendation C —
Policy strategy
Recommendation D —
Periodical evaluation of intermediate objectives and instruments
Recommendation E —
Single market and Union legislation
SECTION 2
IMPLEMENTATION
1.
Interpretation
2.
Criteria for implementation
3.
Timeline for the follow-up
4.
Monitoring and assessment
SECTION 3
FINAL PROVISIONS
1.
ESRB guidance on the application of the macro-prudential instruments
2.
Future reform of the macro-prudential toolkit
ANNEX TO THE RECOMMENDATION ON INTERMEDIATE OBJECTIVES AND INSTRUMENTS OF MACRO-PRUDENTIAL POLICY
1.
Introduction
2.
Identifying intermediate objectives
Intermediate objective |
Underlying market failures |
Mitigate and prevent excessive credit growth and leverage |
Credit crunch externalities: a sudden tightening of the conditions required to obtain a loan, resulting in a reduction of the availability of credit to the non-financial sector. Endogenous risk-taking: incentives that during a boom generate excessive risk-taking and, in the case of banks, a deterioration of lending standards. Explanations for this include signalling competence, market pressures to boost returns, or strategic interaction between institutions. Risk illusion: collective underestimation of risk related to short-term memory and the infrequency of financial crises. Bank runs: the withdrawal of wholesale or retail funding in case of actual or perceived insolvency. Interconnectedness externalities: contagious consequences of uncertainty about events at an institution or within a market. |
Mitigate and prevent excessive maturity mismatch and market illiquidity |
Fire sales externalities: arise from the forced sale of assets due to excessive asset and liability mismatches. This may lead to a liquidity spiral whereby falling asset prices induce further sales, deleveraging and spillovers to financial institutions with similar asset classes. Bank runs Market illiquidity: the drying-up of interbank or capital markets resulting from a general loss of confidence or very pessimistic expectations. |
Limit direct and indirect exposure concentrations |
Interconnectedness externalities Fire sales externalities: (here) arise from the forced sale of assets at a dislocated price given the distribution of exposures within the financial system. |
Limit the systemic impact of misaligned incentives with a view to reducing moral hazard |
Moral hazard and ‘too big to fail’: excessive risk-taking due to expectations of a bailout due to the perceived system relevance of an individual institution. |
Strengthen the resilience of financial infrastructures |
Interconnectedness externalities Fire sales externalities Risk illusion Incomplete contracts: compensation structures that provide incentives for risky behaviour. |