April 6, 2021
At its meeting on March 25, 2021, the General Council of the European Systemic Risk Board (ESRB) continued to debate the impact of the coronavirus pandemic (COVID-19) on financial stability in the European Union (EU ). While noting that the economic situation is expected to improve during the year 2021, she underlined the high uncertainty surrounding the short-term economic outlook, linked in particular to the dynamics of the pandemic and the deployment of vaccination campaigns, as well. than the damage to production capacity and the over-indebtedness caused by the crisis. The General Council reaffirmed that the main source of systemic risk in the EU came from the impact of the pandemic on economic activity – notably through increasing pressures on the solvency of non-financial corporations (NFCs) and indebtedness households – and a possible ripple effect on the financial system. In particular, NFCs in several sectors continued to suffer from a very significant drop in their income, even though they had already exhausted their liquidity reserves and encountered difficulties in renewing their maturing debts.
The General Council noted that it was essential to continue the extraordinary public support measures until the recovery was firmly established, but saw that it was possible to improve their targeting. Preventing a destructive wave of corporate insolvencies and minimizing their cost to society have been essential to preserve economic and financial stability. The General Council stressed that to help rebuild the economy and facilitate adjustment to structural change, current public support measures must become more targeted as the crisis unfolds. He also found it useful to increasingly complement liquidity support with equity support, possibly including quasi-equity and grants, for viable but over-leveraged businesses, noting that successfully containing pressures on Solvency in the non-financial corporate sector was crucial to minimize the spillover effects of the COVID-19 Crisis on the financial sector. A note from the ESRB highlighting the major problems linked to business bankruptcies will be published in the spring.
The General Council considered it essential to contain negative feedback loops between the real economy and the financial system. He supported the call for microprudential banking supervisors to proactively identify and provision Non-Performing Loans (NPLs) and strengthen their organizational capacity for resolving NPLs. He also supported the European Commission’s action plan on NPLs, including measures to improve the depth and efficiency of NPL secondary markets to support NPL resolution. Given the key role of banks in financing EU NFCs, and in particular small and medium-sized enterprises, debt assessment and, where appropriate, restructuring of the debt of viable but over-leveraged companies may need to play a role. important. Member States should identify a set of options to facilitate this process in order to improve the debt repayment capacity of companies. In addition, the General Council called on Member States to review and, where appropriate, improve insolvency and collateral enforcement procedures and strengthen the capacity of the judiciary to avoid bottlenecks.
The General Council also noted an increase in evidence of an overvaluation of asset prices in certain segments of the financial markets, which could lead to a sudden and sharp correction. In this context, he also underlined the risk that the fallout from rising long-term US bond yields on European bond markets could have negative effects on the European economy if the steepening of the yield curve were to significantly precede the recovery. economic.
Given the impact of the COVID-19 pandemic on the real economy, and to help cope with a possible wave of insolvencies, a number of macroprudential authorities have lowered the macroprudential cushion requirements in 2020 to try to prevent banks from acting pro-cyclically and ensure that they continue to provide credit to the economy, thereby promoting its recovery. These measures complemented the flexibility offered by microprudential authorities, including that of the ECB’s banking supervision, which released around € 120 billion of Tier 1 Common Equity capital to help banks continue to fulfill their role. financing of the real economy. At the same time, the responsiveness of macroprudential authorities was uneven across Member States due to the varying magnitude of the available countercyclical capital buffers. Some macroprudential authorities have therefore reacted by lowering or postponing the gradual introduction of certain structural capital buffers (such as systemic risk buffers or buffers from other systemically important institutions). Other macroprudential authorities have communicated to banks the option of using cushions, while refusing to release cushions to strengthen stability and confidence in their banking systems.
The General Council pointed out that European banks were operating with capital levels above the combined cushion requirement, in part thanks to government support measures that helped bank creditors and in part to the response of prudential policies and regulatory. The General Council underlined that the full and timely implementation of the Basel III accord remains a priority. While it was too early to fully assess whether the macroprudential pillows were working as intended, the general council also noted that the evidence already gathered could serve as a starting point for a discussion on improving the pillar framework in the medium term, in the mid-term. opting to contribute to the revision by the European Commission of the macroprudential policy framework in 2022.
Market turmoil in March and April 2020 demonstrated the need to tacklesystemic problems generated by monetary funds (MMF). Although significant changes in the regulation and supervision of MMFs have been introduced in recent years, these reforms have not addressed all sources of systemic risk. In particular, the combination of investor buybacks and deteriorating asset market liquidity has created liquidity management challenges for MMFs that invest in private sector debt securities. These liquidity pressures in the money markets have eased as a result of monetary policy measures, which have also had the effect of supporting the functioning of the market. Against this background, and with the aim of both informing and being informed by related discussions at the global level, the General Council discussed the macroprudential dimension of reforms across the MMF sector, including funds that have not experienced stress over the past year the market turmoil. The General Council will further consider a range of issues, including the broader markets in which MMFs operate, the behavior and expectations of MMF investors, as well as the structure of MMFs and liquidity management tools. available to them, with a view to adopting a recommendation by the end of 2021. A note from the ESRB summarizing the initial considerations in this regard will be published in the spring.
In addition, the General Council considered macroprudential policy issues arising from low interest rates and structural changes in the EU financial system, drawing on a ESRB report published in 2016. The General Council noted that the low interest rate environment was mainly due to structural factors, including demographics, productivity, excess savings and / or low investment. Beyond recent cyclical developments, the COVID-19 shock may have increased the likelihood and persistence of a “long low” scenario, making it “even lower for even longer”. From a medium to long-term perspective, the General Council assessed the risks associated with (i) large-scale risk-taking, (ii) the sustainability of business models and (iii) structural changes in the financial system. He highlighted four main areas of concern, namely:
bank profitability and resilience;
indebtedness and borrower sustainability;
systemic liquidity risk;
the sustainability of the business models of insurers and pension funds offering longer-term performance guarantees.
A report summarizing the analysis and policy proposals of the ESRB will be published in the spring.
Finally, the General Council appointed Professor Stephen Cecchetti as Vice-Chairman of the Scientific Advisory Committee (CSA). Professor Cecchetti, currently the Rosen Family Chair in International Finance at Brandeis International Business School, replaces Professor Richard Portes. Following the departure of the United Kingdom (UK) from the EU, Professor Portes is no longer eligible for the post of ASC Vice-President as UK nationals are no longer EU citizens. The General Council will continue to benefit from his knowledge as long as it remains a member of the ASC and participates in other areas of work, including as co-chair of the Expert Group on Non-Bank Financial Intermediation. The General Council expressed its sincere gratitude to Professor Portes, who, as President and Vice-President, has been a driving force behind the work of the ASC.
The current ESRB assessment of systemic risks in the EU is summarized in the 35e issuance of its risk dashboard, which is released today. The Risk Scoreboard is a set of quantitative and qualitative indicators of systemic risk in the EU financial system.