Text Of European Systemic Risk Board Statement After Meeting

Author: Market News International | Category: News

FRANKFURT (MNI) – The European Systemic Risk Board, housed in the
European Central Bank and chaired by ECB President Mario Draghi, issued
the following statement Thursday after holding its fourth meeting of
2011 — it’s first year of operation:

“In September, the ESRB characterised the current crisis as a
threat to systemic stability. Since then, overall conditions have
worsened as a result of the intensification of negative interlinkages
between sovereign risks and the uncertainty about the resilience of the
financial system, and on account of deteriorating growth prospects.

Reflecting this, European government bond markets continue to be
impaired. In a climate of extreme risk aversion, investors lack
confidence to continue to provide normal level of funding to financial
institutions. Dependence on central banks has risen and signs are
intensifying that stressed financial conditions are passing through to
the real economy.

Since the previous ESRB meeting, policy-makers have sought to
counter these negative developments. In particular, the euro area Heads
of State or Government have agreed on a new “fiscal compact” and on a
significantly stronger coordination of economic policies.

In order to increase the resilience of, and restore confidence in,
the banking sector, the European Banking Authority (EBA) has issued a
recommendation for banks to hold a temporary capital buffer, such that
their core Tier 1 capital ratios reach 9% at the end of June 2012, based
on a one-off valuation of sovereign debt holdings. The European
Securities and Markets Authority (ESMA) has published a statement on the
disclosure and valuation of sovereign exposures in financial accounts
based on the International Financial Reporting Standards (IFRSs).

Central banks of the European Union (EU) have eased monetary
conditions. The European Central Bank (ECB) has lowered its main
refinancing rate and has introduced extraordinary measures to ease the
pressure on banks’ balance sheets. In particular, the ECB has announced
two longer-term refinancing operations (LTROs) with a maturity of 36
months and the option of early repayment after one year, the reduction
of the reserve ratio from 2% to 1% and the broadening of admissible
collateral. The Bank of England has also announced a new contingency
liquidity facility, the Extended Collateral Term Repo (ECTR) Facility,
and central banks around the world have re-established foreign exchange
liquidity facilities.

The ESRB notes the decisions taken thus far both by the Heads of
State or Government and by the European authorities. The swift and
coordinated implementation of those decisions is now of utmost
importance. Against this background: The ESRB urges the committed and
timely implementation of measures agreed upon at the summits of 26
October and of 8-9 December 2011. A reliable and well coordinated
execution of the decisions taken is a prerequisite for the other
measures to succeed. It is essential that the EFSF be fully equipped and
operational.

The ESRB reiterates its message on the need to increase the
resilience of the financial sector. In that context, strict
implementation of EBA criteria to avoid a disorderly or excessive
deleveraging process could support the supply of credit and the
provision of financial services to the real economy.

The core Tier 1 capital ratio of 9% should mainly be achieved
through an increase in capital levels, also by restricting payouts.

By doing so, public authorities would create the incentives for
individual financial institutions to take account of the system-wide
implications of their decisions. The ultimate objective of these
measures should be to restore banks’ function of providing adequate
lending to the real economy. As coordinated EU action becomes effective
and systemic conditions improve over time, supervisors are encouraged to
keep the need for the temporary sovereign buffer under review.

Supervisors are also encouraged to regularly collect ex-ante
information for the assessment of the aggregate implications of
financial institutions’ balance sheet decisions. They should ensure that
sufficiently granular and detailed information is collected and that it
is shared across the European System of Financial Supervision (ESFS).
The intervention by central banks is expected to assuage the funding
pressures felt by banks in the EU in the near term. In the longer term,
private funding markets must be revitalised. Work within the ESFS should
be intensified in this respect — for example on how to facilitate the
re-opening of securitisation markets, in a transparent and prudent way.

With regard to other issues, work is continuing within the ESRB on
risks that may be threatening the resilience of the financial system
either individually or collectively and on developing macro-prudential
policy and instruments in the EU. In particular, work at the ESRB has
focused on further strengthening banks’ management of any risks stemming
from US dollar funding. Moreover, with funding markets impaired and
given recent developments, the ESRB’s General Board decided to examine
the structural features of these markets.

In particular, the ESRB will assess recourse to certain types of
securitised funding and its impact in terms of the encumbrance of assets
and the stability of innovative funding sources. The ESRB has continued
work to develop the basis for macro-prudential policy to seek to prevent
and mitigate systemic risk in the EU going forward. To this end, and
cognisant of the nature and extent of proposed financial system reforms
agreed by the G20, the ESRB is examining relevant legislative
initiatives in the EU with a view to providing macro-prudential
perspectives on the establishment of the new regulatory framework. In
recent months the ESRB has written to the EU legislative bodies
regarding proposals to implement the Basel III agreement in a revised
Capital Requirements Directive and new Regulation for banks and other
credit institutions (CRDIV/CRR) and also regarding proposals for the
regulation of central counterparties (EMIR).

In particular, the ESRB has emphasised to the legislative bodies
the need to ensure that competent national authorities are equipped with
broad discretion to take early action at national level, either upon
their own initiative or upon recommendation of the ESRB. Such action
will be necessary to stem future build-ups of systemic risk associated
with banks as well as the procyclical dynamics that can arise out of
changes in risk management practices by CCPs when setting margin and
collateral haircut requirements. All Members of the EU legislative
bodies are called to take full account during the legislative processes
for the CRD/CRR and EMIR of the concerns on the macro-prudential
instruments that have been communicated to them by the ESRB.

Consistent with the need for strong and pre-emptive actions to
address potential systemic risks at both national and European level,
the ESRB is also working on principles to underpin national mandates for
macro-prudential actions. Going forward, the ESRB will further its work
it this area by considering the minimum set of instruments required at
national as well as European level in order to ensure that authorities
have sufficient means to take action when risks arise in the future. In
doing so, the ESRB is drawing also on work at international level — at
the IMF, FSB, CGFS — to ensure a robust basis for macro-prudential
policies is put into place.

The ESRB’s General Board appointed Ignazio Visco, Governor of the
Banca d’Italia, as the new member of the ESRB Steering Committee,
replacing Mario Draghi, current Chair of the ESRB. The ESRB’s General
Board appointed Daniel Gros, Director of the Centre for European Policy
Studies, as a new member of the Advisory Scientific Committee and
elected Marco Pagano as the new Vice-Chair of the Committee, replacing
Jean- Charles Rochet.”

[TOPICS: M$$EC$,M$X$$$,MGX$$$,M$$CR$,MT$$$$,M$B$$$]

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