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EBA Opinion on the Macroprudential Rules in CRR/CRD

Core Objectives of Macroprudential Policy

The EBA outlines four key objectives for macroprudential policy:

1. Contribute to financial stability
2. Protect the singleness of the European financial market
3. Ensure each macroprudential rule has a clearly defined goal and purpose
4. Ensure transparency in the disclosure of macroprudential measures

These objectives serve as the basis for evaluating the effectiveness, efficiency, and consistency of macroprudential tools.

Classification of Instruments and Pecking Order Considerations

Classification of Tools

• Micro vs. Macroprudential Instruments:

  • Microprudential tools focus on individual institutions and their risk profiles.
  • Macroprudential tools aim to address systemic risks across the financial system.

• System-wide vs. Bank-specific:

  • Some tools apply to the entire banking system, while others are tailored to specific institutions or risk categories.

• Structural vs. Countercyclical:

  • Structural tools aim to address long-term risks and vulnerabilities.
  • Countercyclical tools respond to short-term fluctuations and economic cycles.

Pecking Order Considerations

• Activation of Tools:

  • The order in which macroprudential tools are applied is critical to avoid overlaps and ensure clarity.
  • The EBA notes that the current pecking order is not optimal and recommends adjustments.

• Depletion of Buffers:

  • There is a concern about the potential for buffer depletion during stress periods, which may affect financial stability.

Coordination Considerations

• The EBA emphasizes the need for mandatory coordination between National Competent Authorities (NCAs) to prevent redundant or conflicting measures.

Evaluation of Macroprudential Tools Against Objectives

Key Findings

• Capital Conservation Buffer:

  • Enhances financial stability (yellow score).
  • Preserves level playing field (green score).
  • Goal and purpose are clear (yellow score).
  • Disclosure is insufficient (yellow score).
  • Consistent with Basel (green score).

• CCB:

  • Enhances financial stability (yellow score).
  • Preserves level playing field (green score).
  • Goal and purpose are clear (green score).
  • Disclosure is sufficient (green score).
  • Consistent with Basel (green score).

• G-SII Buffer:

  • Enhances financial stability (green score).
  • Preserves level playing field (green score).
  • Goal and purpose are clear (green score).
  • Disclosure is sufficient (green score).
  • Consistent with Basel (green score).

• O-SII Buffer:

  • Fails to enhance financial stability due to a restrictive 2% cap (red score).
  • Level playing field is not preserved (yellow score).
  • Goal and purpose are not clearly defined (yellow score).
  • Disclosure is insufficient (yellow score).
  • Inconsistent with Basel (yellow score).

• SRB:

  • Enhances financial stability (green score).
  • Fails to preserve level playing field (yellow score).
  • Goal and purpose are not clearly defined (yellow score).
  • Disclosure is insufficient (yellow score).
  • Inconsistent with Basel (yellow score).

• Article 124/164 CRR:

  • Contributes to financial stability (yellow score).
  • Preserves level playing field (green score).
  • Goal and purpose are not clearly defined (yellow score).
  • Disclosure is insufficient (yellow score).
  • Consistent with Basel (green score).

• Article 458 CRR:

  • Only partially contributes to financial stability (yellow score).
  • Fails to preserve level playing field (yellow score).
  • Goal and purpose are not clearly defined (yellow score).
  • Disclosure is insufficient (yellow score).
  • Consistent with Basel (green score).

• Pillar 2:

  • Contributes to financial stability (green score).
  • Fails to preserve level playing field (yellow score).
  • Goal and purpose are not clearly defined (yellow score).
  • Disclosure is insufficient (red score).
  • Consistent with Basel (green score).

• Liquidity Rules:

  • Not yet evaluated due to the need to first develop the microprudential framework.
  • Consistency with Basel is noted (green score).

Policy Recommendations

1. Mandatory Coordination:

   • Implement a coordination mechanism between NCAs to prevent overlapping or conflicting measures.

2. Pecking Order Adjustment:

   • Adjust the hierarchy of macroprudential instruments to place the SRB before Pillar 2 and align Article 458 CRR with Pillar 2 in terms of applicability.

3. Clarify the Purpose and Scope of Tools:

   • Ensure that the purpose and scope of each macroprudential tool are clearly defined to avoid overlaps and ambiguities.

4. Improve Disclosure:

   • Enhance transparency by disclosing the rationale, risk indicators, and motivations behind the application of macroprudential measures.

5. Enhance the O-SII Framework:

   • Increase the cap on O-SII buffer and develop guidelines for its setting to ensure consistency across Europe.

6. Expand the Scope of Article 458 CRR:

   • Extend Article 458 to include specific exposure classes beyond real estate and ensure mandatory reciprocity for higher rates.

7. Clarify the Application of Pillar 2:

   • Improve the clarity of Pillar 2's macroprudential use and its boundaries with other tools.

8. Further Work on Exposure-Based Risks:

   • Address the lack of tools for exposure-based risks and consider expanding the scope of Article 458 and SRB in this area.

Conclusion

The EBA concludes that while some macroprudential tools (e.g., G-SII buffer) are effective and consistent with international standards, others (e.g., O-SII buffer, SRB, and Pillar 2) require significant improvements in terms of clarity, consistency, and transparency. The report also highlights the need for better coordination and a more defined pecking order to ensure that macroprudential measures are applied in a way that promotes both financial stability and the integrity of the European financial market.