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Form and Function of the ESRB: A Critical Analysis

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Regulating and Supervising European Financial Markets

Abstract

The establishment of the European Systemic Risk Board (ESRB) in 2010 must be seen against the backdrop of the preceding financial crisis. The crisis revealed the financial supervisory authorities’ failure, in the run-up to the crisis, to anticipate adverse macroprudential developments and prevent the accumulation of excessive risks within the financial system. This triggered a heightened awareness among regulatory and supervisory authorities regarding stability at a systemic level and macroprudential developments. The creation of the ESRB resonates with other initiatives in the aftermath of the crisis, among them the establishment of the Financial Stability Board (based with Bank for International Settlements in Basel) and, more recently, the conferral of macroprudential powers to the European Central Bank under the Single Supervisory Mechanism. The ESRB is part of the European System of Financial Supervision, the purpose of which is to ensure supervision of the European Union’s financial system. This article begins with a description of the institutional aspects of the ESRB, building on a study of its founding documents and regulation. Special attention is given to the ESRB’s mission and objectives, which are defined as contributing to the prevention or mitigation of systemic risks to financial stability within the European Union. An in-depth analysis of the concepts of systemic risk and financial stability is conducted, because these concepts are crucial for determining the reach of the ESRB’s authority and responsibility. In view of the magnitude of the tasks assigned to the ESRB, this chapter considers whether the ESRB in its existing form is well suited for the large and complex undertaking it is expected to perform. This question is addressed with a critical analysis of the ESRB’s applicable measures as well as its governance structure and decision-making processes. There is reason to believe that organisational improvements will be necessary to obtain the envisaged effectiveness. The chapter concludes with some remarks about the legitimacy and accountability of the ESRB.

T. Myklebust is PhD Researcher at University of Oslo.

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Notes

  1. 1.

    ESRB Annual Report 2012.

  2. 2.

    As a successor to the Financial Stability Forum, founded in 1999.

  3. 3.

    Established 21 July 2010, pursuant to Section 111(e)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

  4. 4.

    It does, however, have a large and complex organisational structure, which will be described below.

  5. 5.

    Ferran and Alexander (2010).

  6. 6.

    Baker (2014).

  7. 7.

    Andenas and Chiu (2014).

  8. 8.

    Moloney (2014).

  9. 9.

    See Alexander (2016).

  10. 10.

    Willke et al. (2013).

  11. 11.

    Avgouleas (2012).

  12. 12.

    Buiter (2009) http://www.publications.parliament.uk/pa/cm200809/cmselect/cmtreasy/1088/108806.htm.

  13. 13.

    Sibert (2010).

  14. 14.

    Report from the Commission to the European Parliament and the Council on the mission and organisation of the European Systemic Risk Board (ESRB), Brussels 8.8.2014 COM (2014) 508 final.

  15. 15.

    Macroprudential Oversight and the Role of the ESRB, IMF Country Report No. 13/70, Technical Note March 2013 International Monetary Fund.

  16. 16.

    See Andenas and Chiu (2014).

  17. 17.

    The Committee of European Banking Supervisors (CEBS), the Committee of European Insurance and Occupational Pensions Regulators (CEIOPS), and The Committee of European Securities Regulators (CESR).

  18. 18.

    Mandate for the High-Level Expert Group on financial supervision in the EU, November 2008.

  19. 19.

    The High-Level Group on Financial Supervision in the EU, Report dated 25 February 2009, Brussels.

  20. 20.

    The de Larosière report was not alone in voicing such concerns. See, for instance, the Turner Review of March 2009 (London UK Financial Services Authority) p. 83: “The lack of such a perspective [system-wide macro-prudential perspective], and the failure to specify and to use macro-prudential levers to offset systemic risks, were far more important to the origins of the crisis than any specific failure in supervisory process relating to individual firms.”

  21. 21.

    Communication for the spring European Council of 4 March 2009—Driving European recovery—Volume 1 [COM(2009) 114 final—Not published in the Official Journal].

  22. 22.

    OJ L 331, 15.12.2010, pp. 1–11.

  23. 23.

    OJ L 331, 15.12.2010, pp. 162–164.

  24. 24.

    Ferran and Alexander (2010).

  25. 25.

    ESRB Regulation Rec. 30.

  26. 26.

    See discussion of the role of Credit Rating Agencies in Chapter 7 in Andenas and Chiu (2014).

  27. 27.

    Report 28 October 2009 “Guidance to Assess the Systemic Importance of Financial Institutions, Markets and Instruments: Initial Considerations” Prepared by the International Monetary Fund, Bank of International Settlements and the Secretariat of the Financial Stability Board and Presented to the G-20 Finance Ministers and Central Bank Governors.

  28. 28.

    Recommendation of the European Systemic Risk Board of 4 April 2013 on intermediate objectives and instruments of macro-prudential policy (ESRB/2013/1).

  29. 29.

    ESRB Regulation Article 3(1).

  30. 30.

    See in particular on pp. 42–44.

  31. 31.

    The arguments in the de Larosière Report against giving microprudential responsibilities to the ECB did not stop the more recent creation of the Single Supervisory Mechanism under the authority of ECB, but the ECB activities relating to the SSM is organisationally divided from its monetary policy operations and related functions. See account in Alexander (2016).

  32. 32.

    Until this arrangement is formally in place, the EEA states have relations with the ESRB on an informal basis.

  33. 33.

    ESRB Regulation Rec. 31.

  34. 34.

    ESRB Regulation Article 3(1).

  35. 35.

    Report from the Commission to the European Parliament and the Council on the mission and organisation of the European Systemic Risk Board (ESRB), Brussels 8.8.2014 COM (2014) 508 final.

  36. 36.

    Andenas and Chiu (2014), Chapter 16.2.

  37. 37.

    See discussion in Alexander (2016) and in Willke et al. (2013), pp. 201–204.

  38. 38.

    ESRB Regulation Rec. 15.

  39. 39.

    For a discussion of the reasons behind establishing the ESRB as a soft-law body, see Ferran and Alexander (2010) and Moloney (2014), p. 1015.

  40. 40.

    ESRB Regulation Article 4.

  41. 41.

    Decision of the European Systemic Risk Board of 20 January 2011, adopting the Rules of Procedure of the European Systemic Risk Board (ESRB/2011/1) OJ C 58, 24.2.2011, pp. 4–10.

  42. 42.

    ESRB Regulation Article 4(2).

  43. 43.

    ESRB Regulation Article 6(1).

  44. 44.

    ESRB Regulation Article 6(2).

  45. 45.

    ESRB Regulation Article 9.

  46. 46.

    ESRB Regulation Article 10.

  47. 47.

    ESRB Regulation Article 5.

  48. 48.

    ESRB Regulation Article 11.

  49. 49.

    Moloney (2014), p. 1012 points out that in practice, given the size of the General Board, the Committee is the location of significant influence within the ESRB and better equipped to act nimbly in crisis conditions.

  50. 50.

    ESRB Regulation Article 13.

  51. 51.

    ESRB Regulation Article 4(5).

  52. 52.

    https://www.esrb.europa.eu/pub/pdf/ATC-mandate.pdf?c862edadf023a6fec36f993fdf02937f.

  53. 53.

    Report from the Commission to the European Parliament and the Council on the mission and organisation of the European Systemic Risk Board (COM (2014) 508 final.

  54. 54.

    ESRB Regulation Article 12.

  55. 55.

    ESRB Regulation Article 12(1).

  56. 56.

    ESRB Regulation Article 12(2).

  57. 57.

    Council Regulation Rec. 7 and 8.

  58. 58.

    ESRB Regulation Article 4(4).

  59. 59.

    Ferran and Alexander (2010) and Moloney (2014), p. 1015.

  60. 60.

    Moloney (2014), p. 1015, 1016.

  61. 61.

    ESRB Regulation Article 7.

  62. 62.

    ESRB Regulation Article 8.

  63. 63.

    Decision of the European Systemic Risk Board of 3 June 2011 on public access to European Systemic Risk Board documents (ESRB/2011/5), OJ C 176, 16.6.2011, pp. 3–6.

  64. 64.

    OJ C 140, 11.5.2011, pp. 18–19.

  65. 65.

    See Moloney (2014) who states on p. 1016 that governance difficulties existed from the outset, given the size of the General Board and its difficulties in acting nimbly.

  66. 66.

    Report from the Commission to the European Parliament and the Council on the mission and organization of the European Systemic Risk Board (ESRB), Brussels 8.8.2014 COM (2014) 508 final.

  67. 67.

    Macroprudential Oversight and the Role of ESRB, Technical Note March 2013 International Monetary Fund.

  68. 68.

    ESRB Regulation Article 15(2).

  69. 69.

    Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), OJ L 331, 15.12.2010, pp. 12–47, Regulation (EU) No 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), OJ L 331, 15.12.2010, pp. 48–83, Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), OJ L 331, 15.12.2010, pp. 84–119.

  70. 70.

    ESRB Regulation Article 15(3).

  71. 71.

    Article 36(2) of Regulation (EU) No 1093/2010, of Regulation (EU) No 1094/2010, and of Regulation (EU) No 1095/2010.

  72. 72.

    ESRB Regulation Article 15(6).

  73. 73.

    ESRB Regulation Article 15(7).

  74. 74.

    ESRB Regulation Article 15(5).

  75. 75.

    Rules of Procedure Article 28.

  76. 76.

    ESRB Regulation Article 14.

  77. 77.

    Note ESRB Regulation Rec. 14.

  78. 78.

    ESRB Regulation Articles 15(1) and 3(2)(g).

  79. 79.

    ESRB Regulation Article 3(2)(b).

  80. 80.

    ESRB Annual Report 2012, p. 40.

  81. 81.

    Ibid.

  82. 82.

    Ibid.

  83. 83.

    Ibid.

  84. 84.

    The ESRB Regulation Rec. 20.

  85. 85.

    Ferran and Alexander (2010) See also Moloney (2014), p. 1014.

  86. 86.

    See Moloney (2014), p. 1016.

  87. 87.

    ESRB Regulation Article 16(1).

  88. 88.

    ESRB Regulation Article 16(2).

  89. 89.

    ESRB Regulation Article 16(3).

  90. 90.

    ESRB Regulation Article 3(2)(f) and Rec. 20.

  91. 91.

    ESRB Regulation Article 17(1).

  92. 92.

    ESRB Regulation Article 17(2).

  93. 93.

    Moloney (2014), p. 1014.

  94. 94.

    Regulation (EU) No 1093/2010, Regulation (EU) No 1094/2010, and Regulation (EU) No 1095/2010.

  95. 95.

    ESRB Regulation Article 18(1).

  96. 96.

    Ferran and Alexander (2010) refer to this as the power to “name and shame.”

  97. 97.

    ESRB Regulation Article 18.

  98. 98.

    ESRB Regulation Article 17(3).

  99. 99.

    Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, OJ L 176, 27.6.2013, pp. 338–436.

  100. 100.

    Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176, 27.6.2013, pp. 1–337.

  101. 101.

    https://www.esrb.europa.eu/mppa/html/index.en.html.

  102. 102.

    https://www.esrb.europa.eu/pub/pdf/other/140303_flagship_report.pdf?8f8da2fc90daf800ea1a1547beb81352.

  103. 103.

    https://www.esrb.europa.eu/pub/pdf/other/140303_esrb_handbook_mp.en.pdf.

  104. 104.

    https://www.esrb.europa.eu/pub/pdf/other/Decision_ESRB_2015_4.pdf.

  105. 105.

    ESRB, Macro-Prudential Commentaries, Issue No: 7 July 2014.

  106. 106.

    https://www.esrb.europa.eu/mppa/html/index.en.html.

  107. 107.

    Ferran and Alexander (2010).

  108. 108.

    Willke et al. (2013), p. 203.

  109. 109.

    Andenas and Chiu (2014), p. 450.

  110. 110.

    ESRB Regulation Rec. 24.

  111. 111.

    ESRB Regulation Article 3(2)(g).

  112. 112.

    ESRB Regulation Article 3(2)(h).

  113. 113.

    ESRB Regulation Article 16(2).

  114. 114.

    ESRB Regulation Article 3(2)(i).

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Acknowledgment

I am grateful to Professors Gudula Deipenbrock and Mads Andenas for comments on earlier drafts. Any errors are mine.

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  1. University of Oslo, Oslo, Norway

    Trude Myklebust

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Correspondence to Trude Myklebust .

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  1. Faculty of Law, University of Oslo, Oslo, Norway

    Mads Andenas

  2. HTW Berlin University of Applied Sciences, Berlin, Germany

    Gudula Deipenbrock

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Myklebust, T. (2016). Form and Function of the ESRB: A Critical Analysis. In: Andenas, M., Deipenbrock, G. (eds) Regulating and Supervising European Financial Markets. Springer, Cham. https://doi.org/10.1007/978-3-319-32174-5_3

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  • DOI: https://doi.org/10.1007/978-3-319-32174-5_3

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