Imagine that in January, you will become your country’s chief firefighter, but that the very best reports of smoke currently available are unreliable and intermittent. Scared?
Well, the European Systemic Risk Board is due to launch in January, and the ECB’s vice president has just pointed out that, on current data availability, the Board would struggle to do its job. That job, as a quick reminder, is to “assess and prevent potential risks to financial stability in the EU.” No small task, with markets febrile and bank bail-outs still in vogue.
The ECB has a fair bit of data already, but it is geared towards monetary policy rather than macro-prudential regulation. So, what’s missing?
The IMF has tried to rally the troops at a meeting in China, urging central bankers to maintain the international co-operation forged during the financial crisis, and looking to Asia to lead the way.
At an IMF-sponsored meeting of central bankers and regulatory luminaries in Shanghai, an “important consensus” was reached, according to PBoC deputy governor Yi Gang, on the need for international co-operation in ensuring strong macro-prudential policies, because systemic risks “are very likely to spread over borders.” In practice, this means central banks and national regulators taking on more international roles.
Central banks also need to take a broader view domestically, said IMF managing director Dominique Strauss Kahn, seeming to suggest that financial stability would be part of central banks’ remits going forward. “Clearly, conventional macroeconomic policies and macro-prudential tools are intrinsically linked, just as price stability and financial stability are intrinsically linked,” Strauss-Kahn said. “We need a holistic approach, which means a changing role for central banks in the years ahead.”
Basel policymakers, beware: higher capital requirements for banks can increase systemic risk. Although risks are lower for each bank individually, “systemic linkage” between the banks is higher. Depending on the banks’ balance sheets, this can mean higher systemic risk.
Researchers at the Dutch central bank explain: