FAQ | Macroprudential supervision

Effective microprudential and macroprudential supervision constitute two pillars of a stable financial system. Both types of supervision have different intermediate objectives, nevertheless, in a long-term perspective they jointly contribute to financial stability as their final aim. However, some tensions between those two policies may occur, in particular due to the fact that in both cases similar financial regulations are used as their instruments.

The objective of microprudential supervision is to ensure the financial safety of depositors and other users of financial services. In order to do so, microprudential supervisor aims at ensuring the stability of individual financial institutions and their compliance with regulatory requirements.

Experience shows that ensuring the safety of individual financial institutions is not a sufficient condition for the soundness and stability of the whole financial system due to the fallacy of composition. This means that actions taken by individual institutions might be rational from their perspective; however, at the level of the whole financial system, collective action might lead to negative externalities.

As a consequence, traditional microprudential supervision has to be complemented by a new approach, i.e. macroprudential supervision, which aims at constraining and mitigating systemic risk and ensuring the stability of the financial system as a whole, taking into account the interactions between the financial sector and the real economy.

Systemic risk is the risk of disruption in the functioning of the financial system, which, if it materializes, may impair the functioning of the financial system and the national economy as a whole. The source of systemic risk may be, for example excessive lending, excessive leverage of financial institutions, high indebtedness of households or companies, or high interconnectedness between financial institutions. Systemic risk may accumulate in different parts of the financial system (so-called structural dimension), as well as gradually build up over time (so-called time dimension). The materialization of systemic risk leads to financial crises which are very expensive for society. Therefore, it is necessary to create a special institution/body which would identify and mitigate risk before it becomes a source of a financial crisis and which would also act in order to enhance the resilience of the financial system so that in the event of systemic risk materialization the negative consequences for the real economy would be as small as possible.

Macroprudential instruments are instruments used to constrain identified systemic risk. Some instruments have been specifically developed for macroprudential purposes, i.e. the countercyclical capital buffer, systemic risk buffer or buffers imposed on systemically important financial institutions. Furthermore, some microprudential instruments are used within the macroprudential framework; however, they are calibrated with systemic risk in mind in order to target identified threats for financial stability.

The European Systemic Risk Board is an independent authority of the European Union responsible for macroprudential supervision over the European financial system. It is one of the building blocks of the European System of Financial Supervision (ESFS), which was created in response to the global financial crisis. The ESRB was created on the grounds of a regulation which entered into force on 16 December 2010. The main objective of the ESRB is to mitigate and prevent systemic risks to financial stability in the European Union. Such risks may result from both the interconnectedness between financial institutions and markets, as well as from macroeconomic and structural conditions. The ESRB may issue warnings and recommendations. It shall contribute to the smooth functioning of the internal market and thereby ensure a sustainable contribution of the financial sector to economic growth. The ESRB has its seat in Frankfurt am Main (European Central Bank).

The European Central Bank (ECB) and national central banks of Member States play an important role in the organization and functioning of the European Systemic Risk Board. The General Board – the decision-making body of the ESRB – is composed of the governors of central banks from all EU Member States and is chaired by the President of the European Central Bank. The ECB ensures the secretariat and provides analytical, statistical, logistical and administrative support to the ESRB. The organizational structure of the ESRB includes the following: the Steering Committee (supporting the decision-making process) and two advisory committees – the Advisory Technical Committee and the Advisory Scientific Committee. Marek Belka, the President of Narodowy Bank Polski, was a Member of the Steering Committee between 2011-2016.

In January 2012 the European Systemic Risk Board (ESRB) published the Recommendation on the macroprudential mandate of national authorities (ESRB/2011/3) addressed to the Member States. In this Recommendation the ESRB indicated the necessity to establish an authority responsible for macroprudential supervision at the national level. The ESRB recommendation is composed of several sub-recommendations concerning the creation of a macroprudential authority, its objective, tasks, competences, instruments as well as its independence and accountability. The ESRB left to the discretion of the Member States the choice of the institution model; however, it emphasized that central banks should have a leading role in macroprudential supervision.