Banking Union and Governance of

Individual Clients/Actors RelationshipsThe Banking Union and the Creation of Individual Duties

EUI, March 19 & 20, 2015

Motivation

Goal of macro-prudential policy (supervision)

narrow: systemic stability of banks

broad: stable economy and financial system through the cycle

Target is to influence specific conditions for lenders/borrowers

(not general financial conditions for real economy)

Indirectly, yet intendedly affects banks’ services via-à-vis clients

Public governance of bank-client relationship that influences

resource allocation in decentralized decisions (contracting)

determines framework parameters of specific transactions

seeks to promote common good (prima vista heteronomous)

In its mode of operation akin to monetary policy

(also linked in objectives)3/17/2015 1

Transmission of monetary and macro-prudential policies

3/17/2015 2

Risk free interest

rate

(price of leverage)

Macro

-

pru

den

tial

po

licy

Fin

an

cia

l

sta

bility

balance sheet

(portfolio choice,

buffers)

Financial sector

(subset, individual

institution)

Mo

neta

ry

po

licy

Pric

e

sta

bility

Non-financial

sector

Macro-prudential

tool

(price and

quantity of risk)

Expectations

(inter-temporal

allocation)

Mu

tua

l

re-e

nfo

rcem

ent

The importance of macro-pru in times of QE

QE (ECB‘s PSPP) is supposed to work through portfolio

rebalancing

increased liquidity raises asset prices of other FI

has welfare effects

boosts demand (and thus achieves price stability)

but also breads potential for bubble and crash (financial instability)

(unconventional) monetary policy measure requires macro-

prudential policy counterweight

Note: if QE operates instead only via exchange-rate as a

beggar-thy-neighbor policy macro-prudential counterbalance is

of less immediate importance

3/17/2015 3

Real estate mortgage markets as a particular example

Excessive credit-growth, unsustainable developments in real

estate markets and built-up of leverage in private sector,

Reinhart & Rogoff (2009), Borio & Drehmann (2009)

3/17/2015 4

Schularick et al., 2014

Macro-prudential tools targeting excessive credit growth

3/17/2015 5

(macro-prudential) instrument legal basis objective

CCB CRD IV arts. 130,

135-140Enhance banks‘ loss absorption

capacity (higher resilience) and

increase funding costs to slow

down credit growth/moderate

financial cycle (lower

vulnerability)

Sectoral requirements for specific

exposures (e.g. increased risk

weights, minimum LGD values)

CRR arts. 124, 164,

pillar 2 (SREP), CRR

458

SRB CRD arts. 133, 134

Own funds, capital conservation

buffer requirements

pillar 2 (SREP), CRR

art. 458

LTV cap

LTI/DSTI cap

National law direct restriction of lending to

decrease banks‘ LGD and

borrower‘s PD

Leverage ratio National law Limit banks‘ leverage (failsafe

for risk-based capital buffers)

Cooling-down overheated real-estate markets

Capital buffers not very effective in highly collateralized markets

CCB (≤ 2,5% CET1), SRB (≤ 5% CET1), national macro flexibility

(≤ 2% CET1) can reach sizeable proportions

extra capital has to be held against risk-weighted assets, i.e.

highly collateralized real estate loan (risk weight of approx. 10%)

Even if (common) buffer rates were maxed out, less than one

percent of loan would have to be held in additional CET1 (0.095 x

0.10)

Arguably caps (LTV, LTI, DSTI) and leverage ratio work better

3/17/2015 6

The role of the ESRB within the SSM

ESRB is supranational macro-prudential authority (EU 28) also

vis-à-vis ECB (Secretariat located at ECB, Regulation

1096/2010, arts. 2, 3)

voluntary information flow from ECB to ESRB, ESRB Reg. art.

15(2); SSM Reg. art. 27(2)

information request from ESRB to ECB, ESRB Reg. art. 15(5)-(7);

SSM Reg. art. 3(1)

ESRB recommendations and warnings directed to ECB (ESRB

Reg. arts. 16(2), 1(3)(f): ECB as supervisory authority, cf. e.g.

EBA Reg. art. 2(2)(f) as amended

ESRB recommendations and warnings “enforced” through act or

explain mechanism (ESRB Reg. art. 17) and public pressure

(ESRB Reg. art. 18)

3/17/2015 7

The banking union angle

ECB to top-up national macro-prudential measures, SSM-Reg.

art. 5(2)

can push through inconvenient policies (supra-nationalization was

intended to reduce forbearance of NCAs, Tröger, 2014)

has comprehensive view including interaction with monetary

policy measures (Smets, 2014)

NB: separation of monetary policy and supervisory function that

allows for adequate flow of information is key

ECB competence limited to (macro-prudential) instruments “in

accordance with relevant Union law…subject to the procedures

set out in the Regulation (EU) No 575/2013 and Directive

2013/36/EU in the cases specifically set out in relevant

Union law”

3/17/2015 8

Macro-prudential supervision in the banking union

3/17/2015 9

ESRB bank client

flow of information

(voluntary and requested)

ECB

flow of information

(voluntary and requested)

recommendations

and warnings

recommendations

and warnings

top-up of CRD IV/CRR

macro-prudential tool

NCA

CRD IV/CRR

macro-prudential tool

national law

macro-prudential tool

Conclusion

Macro-prudential instruments constitute tool of public

governance of (newly established) bank-client relationships

Do not allow to intervene directly in existing contracts

Banking union establishes ECB to safeguard impartial and non-

forbearing enforcement of supervisory framework also with

regard to macro-prudential measures

Objective seems somewhat insufficiently implemented when it

comes to limit excessive credit growth in overheated real estate

markets

3/17/2015 10