Why was the ESRB established?
Following the significant effects of the global financial crisis, the concept of financial stability came increasingly under the spotlight at international level. Specifically, starting 2009, several bodies were established – such as the Financial Stability Board (FSB), the Financial Stability Oversight Council (FSOC) in the United States and the European Systemic Risk Board (ESRB) in the European Union in order to contribute to safeguarding financial stability by identifying and monitoring risks to the financial system.
The ESRB is responsible for the macroprudential oversight of the EU financial system. In pursuit of its mandate, the ESRB contributes to the prevention or mitigation of systemic risks and to the efficient functioning of the internal market, thereby ensuring a sustainable contribution of the financial sector to economic growth.
The ESRB issues recommendations and warnings in the field of macroprudential oversight for all EU Member States, the mechanism at work being of the type “comply or explain”. This means that Member States either act on the recommendations or provide adequate justification for inaction. The ESRB has so far issued 10 Recommendations on topics such as the funding of credit institutions, intermediate objectives and instruments of macroprudential policy, guidance for setting countercyclical buffer rates, and so on. Recommendation ESRB/2011/3 concerns the setting of the macroprudential mandate of national authorities and designating the macroprudential authority, stipulating that recommended measures should be in force by February 2014 (the initial deadline was 1 July 2013).
Why is the National Committee for Macroprudential Oversight (NCMO) necessary?
Law No. 12/2017 on the macroprudential oversight of the national financial system was adopted in Romania for the implementation of Recommendation ESRB/2011/3. Law No. 12/2017 provides for the establishment of the National Committee for Macroprudential Oversight (NCMO) as an inter-institutional cooperation structure without legal personality, for coordinating the macroprudential oversight of the national financial system by setting the macroprudential policy and the appropriate instruments for its implementation. The NCMO was set up taking after the ESRB model.
The NCMO comprises representatives of authorities that play an important part in ensuring financial stability in Romania, namely the National Bank of Romania (NBR), the Financial Supervisory Authority (FSA), and the Government of Romania. A representative of the Bank Deposit Guarantee Fund attends the General Board meetings with an observer status.
The Committee’s primary objective is to help safeguard financial stability, also by strengthening financial system resilience and by containing the build-up of systemic risks, thereby ensuring a sustainable contribution of the financial sector to economic growth.
On what basis was the NCMO established?
The NCMO was set up following the ESRB Recommendation on the macroprudential mandate of national authorities (ESRB/2011/3), whereby Member States are recommended to “designate in the national legislation an authority entrusted with the conduct of macroprudential policy, generally either as a single institution or as a board composed of the authorities whose actions have a material impact on financial stability”.
What powers has the NCMO been entrusted with?
The NCMO may only issue warnings and recommendationsArticle 4, paragraphs (1) and (2) of Law No. 12/2017 (soft law) addressed to the NBR or the FSA, in their capacity as national authorities responsible for sectoral financial supervision, as well as recommendations to the Government for the purpose of safeguarding financial stability. The NCMO issues recommendations and warnings in the field of macroprudential oversight based on the same “comply or explain” mechanism used by the ESRB, whereby national authorities either act on the recommendations or provide adequate justification for inaction.
Moreover, in Recommendation ESRB/2011/3 (recommendation E), Member States are recommended to ensure that “in the pursuit of its objective, the macroprudential authority is as a minimum operationally independent, in particular from political bodies and from the financial industry”.
The Committee is ultimately accountable to the Parliament, in compliance with the provisions of the law, being bound to submit an Annual ReportArticle 11, paragraph (1) of Law No. 12/2017.
Are there similar national macroprudential authorities in other European countries as well?
As a follow-up to Recommendation ESRB/2011/3 on the macroprudential mandate, Member States have assigned the role of designated macroprudential authority either to a single institution – the central bank (Belgium, Czech Republic, Cyprus, Estonia, Greece, Ireland, Latvia, Lithuania, Malta, UK, Portugal, Slovakia, Hungary) or the supervisory authority (Finland, Sweden) – or to a board composed of the authorities whose actions have a material impact on financial stability (Austria, Bulgaria, Croatia, Denmark, France, Germany, Italy, Luxembourg, the Netherlands, Poland, Romania, Slovenia, Spain). For further details, see the ESRB Recommendation on the macro-prudential mandate of national authorities (ESRB/2011/3) – Follow-up Report – Overall assessment.
So far, only two Member States (Italy and Spain) have not finalised their legislative process, while in all other countries the macroprudential authority is already operational.
What is the countercyclical capital buffer?
The countercyclical capital buffer (CCB) is part of the macroprudential toolkit included in the CRDIV/CRR legislative framework. The European Systemic Risk Board recommends this instrument to be implemented in order to reduce and prevent excessive credit growth and leverage. The aim of the CCB is to improve the banking sector’s resilience to possible shocks.
What is the capital buffer relating to other systemically important institutions (O-SIIs)?
The objectives of imposing additional capital requirements upon systemically important institutions consist in: (i) enhancing their loss-absorbing capacity, thus minimising systemic risk stemming from the size of such institutions and the probability of financial distress, while also mitigating the intensity of its potential impact; and (ii) correcting for distortions in risk-taking incentives of the so-called “too-big-to-fail” entities caused by any implicit public guarantee, thereby ensuring a level-playing field for all banks.
The NBR has implemented at national level the methodology for identifying systemically important credit institutions in line with the EBA Guidelines. The criteria for assessing domestic systemically important institutions are as follows:
- in the first stage, a score is calculated based on the mandatory indicators laid down in the EBA Guidelines on the assessment of O-SIIs, at the highest consolidation level, for the entities under the national competent authority’s jurisdiction, including subsidiaries in other Member States and third countries. This mandatory stage helps achieve an appropriate degree of convergence in terms of identifying systemically important institutions across Member States and making this assessment process comparable, transparent and comprehensible;
- in the second stage, the national competent authority uses additional indicators selected from the list of optional indicators in the EBA Guidelines. The additional indicators should reflect the specificities of the national banking sector, with a view to identifying all systemic institutions, including smaller ones, which have not been automatically designated as systemic during the first stage. The need for this step arises from the differences in terms of size and specificities of national financial systems across Member States.
The two stages strike a balance between convergence, comparability and flexibility in identifying systemic institutions.
What is the systemic risk buffer?
The systemic risk buffer aims to prevent and mitigate long-term structural systemic risk or macroprudential risk with potential negative consequences for the financial system and real economy. This buffer is made up of Common Equity Tier 1 capital of at least 1 percent based on the relevant exposures. It may apply to exposures located in Romania, in third countries, as well as to exposures located in other Member States.