Financial Crime World

ESRB’s Macroprudential Measures: A Review of Effects and Assessment

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The European Systemic Risk Board (ESRB) has implemented various macroprudential measures to strengthen financial stability by mitigating systemic risks in the banking sector. This article reviews the effects and assessment of these measures, focusing on their implementation in Iceland.

Assessing Cross-Border Effects

When implementing macroprudential measures, it is crucial to assess cross-border effects. This refers to the potential impact of a measure on other Member States and the Single Market. In the case of Icelandic banks, which have limited operations within EU member states, the likelihood of significant cross-border effects is low.

Factors Affecting Cross-Border Effects

  • Limited operations in EU member states
  • No significant exposure to cross-border risks

Leakages and Regulatory Arbitrage

Another important consideration is the potential for “leakages” or regulatory arbitrage within the notifying Member State. This occurs when entities attempt to circumvent a measure by shifting activities or operating in other parts of the financial sector. In Iceland, the risk of leakages is considered low due to:

  • Consolidated application of O-SII buffer at the highest level
  • Lack of incentives for banks to reduce operations

Factors Affecting Regulatory Arbitrage

  • Consolidated application of O-SII buffer
  • No incentives for banks to reduce operations

Combinations with Other Measures

The ESRB’s recommendations also cover combinations between G-SII and O-SII buffers, as well as systemic risk buffers (SyRBs). In Iceland:

  • O-SII buffer is applied in combination with SyRBs at a rate of 3% on domestic exposures only
  • The sum of these rates does not exceed 5%

Combinations of Macroprudential Measures

  • O-SII buffer and SyRBs: 3% on domestic exposures only, up to a maximum of 5%

Conclusion

The ESRB’s macroprudential measures aim to promote financial stability and mitigate systemic risks in the banking sector. In Iceland:

  • Implementation of O-SII buffer has been assessed as having a neutral impact on lending growth and own funds requirements
  • Likelihood of significant cross-border effects or leakages is considered low
  • Combinations with other measures are carefully managed

Contact Information

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Date of Notification

This notification was uploaded on July 12, 2023.