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EBA Report Summary: Macroprudential Policy Measures - July 2015

Core Content

This report, published by the European Banking Authority (EBA) in July 2015, provides an analysis of the implementation of macroprudential policy measures under the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD IV) in the first five quarters following their introduction in January 2014. It focuses on the interaction between macroprudential and microprudential objectives and tools, and highlights practical implementation challenges.

Main Objectives

• To assess the range of macroprudential policy measures implemented by EU Member States and Norway.
• To examine how these measures interact with microprudential tools and objectives.
• To provide insights for the ongoing discussions on the macroprudential toolbox in the EU and support regulatory work by the European Commission, EBA, and ESRB.

Scope of the Report

The report covers the following macroprudential measures:

• Higher risk weights or stricter criteria for exposures secured by mortgages on immovable property under the standardised approach (Art. 124 CRR)
• Higher minimum LGD for retail exposures secured by immovable property (Art. 164 CRR)
• Stricter national measures under Art. 458 CRR
• Use of Pillar 2 for macroprudential purposes
• Setting or resetting of O-SII and G-SII buffers (CRD 131)
• Setting or resetting of the systemic risk buffer (SRB) (CRD 133)

It excludes the countercyclical capital buffer (CCB) and capital conservation buffer due to their less relevance to the interaction between macroprudential and microprudential policies.

Key Observations

• Implementation Overview: 32 macroprudential measures from 14 EU countries and Norway were communicated to the EBA, with 15 related to real estate risks and 17 to systemic risks and SII.
• Most Common Measures: Art. 124 CRR and SRB were most frequently used, while Art. 164 CRR was used only once.
• Capital Focus: All but one of the measures affect capital requirements, with no measures addressing liquidity requirements.
• Reciprocation: Only three reciprocations were reported, all related to real estate measures under Art. 124 and 458 CRR.
• Pillar 2 Use: Pillar 2 was applied in six cases, primarily for real estate risks and to address excessive trading activities in Belgium.

Real Estate Measures

3.1 Objective

Real estate risk measures aim to mitigate the impact of housing market developments on financial stability. They include:

• Adjustments to risk weights
• Changes to LGD assumptions
• Additional capital requirements

3.2 Impact on Internal Models

• Most real estate measures impact the use of internal models by affecting risk weights.
• Some measures, like the increase in LGD for retail exposures in Norway, raise questions about the alignment of macroprudential and microprudential objectives.

3.3 Impact on Stress Testing

• Macroprudential measures and capital requirements derived from stress tests may lead to double-counting of risks.
• This requires careful consideration in the design of measures and during stress testing exercises.

3.4 Governance

• The use of Pillar 2 for macroprudential purposes raises governance challenges, including capital decision processes and the interaction with other capital requirements.
• Coordination between macroprudential and microprudential authorities is essential, especially for Pillar 2 measures.

3.5 Transparency

• There is significant variation in the level of detail provided in notifications.
• Some notifications focus on qualitative information or preserve existing capital requirements, which may reduce transparency and comparability across the EU.

3.6 Reciprocation

• Reciprocation is required for Art. 124 and 164 CRR, but not explicitly for Art. 458 CRR or Pillar 2.
• Only three cases of voluntary reciprocation were reported, indicating limited cross-border coordination.

3.7 Information Provided in Notifications

• Notifications often lack clarity on the objective of the measure, especially regarding the distinction between macroprudential and microprudential purposes.
• Some countries use the same measure for both purposes, complicating the understanding of their rationale.

Systemic Risk Measures (Excl. Real Estate) and SII

4.1 Objective

These measures aim to address systemic risks and the designation of systemically important institutions (SII), including the setting of O-SII and G-SII buffers and the SRB.

4.2 Impact on Internal Models

• Similar to real estate measures, these affect internal models, particularly in terms of capital requirements and risk assessment.

4.3 Impact on Stress Testing

• The interaction between macroprudential and stress testing tools may result in double-counting of risks, requiring careful design and coordination.

4.4 Governance

• Governance challenges are similar to those under real estate measures, particularly with Pillar 2 and the application of SRB.

4.5 Transparency

• Transparency issues persist, with inconsistent levels of detail in notifications.
• Central communication and coordination are recommended to improve clarity and comparability.

4.6 Reciprocation

• Reciprocation is less common for systemic risk measures, highlighting the need for more guidance and standardization.

4.7 Information Provided in Notifications

• Information provided is often insufficient, especially regarding the rationale and macroeconomic basis of the measures.
• The report recommends additional guidance and more detailed data sharing to enhance transparency.

Conclusion

• The current framework allows significant flexibility but also leads to inconsistencies and overlaps in the application of macroprudential and microprudential tools.
• The use of Pillar 2 for macroprudential purposes raises concerns about governance, transparency, and the potential for double-counting.
• Coordination between macroprudential and microprudential authorities is crucial, especially for Pillar 2 measures.
• There is a need for further harmonization and standardization to ensure consistency and clarity in the implementation of macroprudential tools.

Annex: Summary of Notifications

• The annex provides a summary of all real estate and systemic risk measures communicated to the EBA.
• It includes the number of notifications per measure and the relevant authorities involved.
• Notifications regarding the CCB are also listed, though they are not in the scope of the report.