Macroprudential Regulation and Risks

The Capital Conservation Buffer (CCoB) and the Countercyclical Capital Buffer (CCyB) are relatively new macroprudential instruments in the EU, aimed at improving the resilience of the banking sector in order to sustain the provision of credit to the real economy in periods of stress. The time-varying CCyB rate has a more complex setup and is used at the discretion of EU Member States compared to the non-cyclical, fixed requirement for the CCoB, which is harmonised at EU level. The EU legislative framework was amended in 2019 as part of a broader banking reform package, which made targeted improvements to certain macroprudential policy provisions. Directive (EU) 2019/878 (CRD V), inter alia, simplifies the CCyB notification process and expands the role of the European Systemic Risk Board (ESRB). The leading role in setting and implementing the CCyB still lies with the EU Member States and is now jointly exercised with the European Central Bank (ECB) in its capacity as macroprudential authority for the Member States covered by the Single Supervisory Mechanism (SSM).

potensialının gücləndirilməsi məsələlərini əhatə edir. Ölkədə davam etdirilməkdə olan struktur islahatları əsasən qeyri-neft sektorunun inkişafına ciddı təsir göstərməkdədir. Kiçik və orta müəssisələrin özəlləşdirilməsinin demək olar başa çatdırılması, bu sektorda rəqabət mühitinin qismən təmin olunması, biznes mühitinin yaxşılaşdırılması üçün tədbirlərin görülməsi, biznes fəaliyyətinə lüzumsuz dövlət müdaxiləsinin azaldılması, vergi dərəcələrinin mərhələ-mərhələ aşağı salınması yolu ilə biznes fəaliyyətinin canlandırılması qeyri-neft sektorunda fəalliğın artırılmasına şərait yaratmışdır. Struktur islahatları xüsusi ilə, tikinti, kənd təssərrüfatı, xidmət sektorunda yaranan xarici və yerli investisiyaların cəlb olunmasına imkan vermiş və bununla da həmin sahələrdə digər sahələrə nisbətən daha cəsarətli artım təmin olunmuşdur.

This article attempts to find answers to questions of current significance: How concentrated is Ukraine’s
banking system from the viewpoint of the world’s best regulatory practices and in comparison with other
countries? What has been the driving force behind the growing concentration in recent years and does this
process pose a threat to competition in the banking system? What effect would mergers and acquisitions in
the banking sector have on the concentration of the banking system? And finally, do public authorities have
to stimulate consolidation in the banking system or, on the contrary, restrain potential bank mergers and
acquisitions?
The results of empirical analysis dispel the persisting myths about the risks of fast and excessive concentration
resulting from continuing market consolidation and about the substantial impact of inequality on the
growing concentration, and refute the perceived danger of mergers and acquisitions in the banking sector.
Instead, it was discovered that concentration of banking assets in Ukraine is not substantial according to
the Herfindahl–Hirschman Index (HHI), CRn concentration index and other ratios. At the same time, in the
conditions of continuing consolidation of the banking system via mergers and acquisitions and a decreasing
number of banks, upward trends are observed within moderate, average European levels. Therefore, these
new conditions require closer attention on the part of banking regulators to assess possible consequences of
concentration.
This article provides recommendations to the National Bank of Ukraine (NBU) and the Antimonopoly
Committee of Ukraine (AMCU) on how to improve monitoring of banking concentration processes and better
regulate consolidation processes in bank mergers and acquisitions. A complex of preventive macroprudential
measures was offered to offset the negative consequences of concentration and achieve an optimal degree of
market consolidation.

The policy framework on the countercyclical capital buffer (CCyB) and the capital conservation buffer (CCoB) is still in its early stages of implementation in the European Union (EU). Prior to the COVID-19 pandemic crisis, a general inaction bias prevailed among its Member States. The recent experience with emergency macroprudential relaxation measures in response to the pandemic shock highlighted the need for improved capital buffer usability. As the relevant framework heads towards a more mature phase, this paper discusses lessons learned from the use of buffers so far, recent findings regarding factors inhibiting their deployment and key suggestions on making the buffers fully usable in times of trouble, thus hoping to contribute to the macroprudential debate following the buffers' first stress event.

The policy framework on the countercyclical capital buffer (CCyB) and the capital conservation buffer (CCoB) is still in its early stages of implementation in the European Union (EU). Prior to the COVID-19 pandemic crisis, a general inaction bias prevailed among its Member States. The recent experience with emergency macroprudential relaxation measures in response to the pandemic shock highlighted the need for improved capital buffer usability. As the relevant framework heads towards a more mature phase, this paper discusses lessons learned from the use of buffers so far, recent findings regarding factors inhibiting their deployment and key suggestions on making the buffers fully usable in times of trouble, thus hoping to contribute to the macroprudential debate following the buffers' first stress event.

Macro-prudential measures implemented in individual Member States may have cross-border or cross-sectoral repercussions. This special feature discusses cross-border spillover channels. To limit negative spillover effects, macro-prudential instruments should be applied consistently across countries, and reciprocity agreements must be applied transparently. JEL Classification: G00

This article relates to the conference that Professor Quintás-Seoane gave on April 14, 2018, at the University of Santiago de Compostela (whose faculty he belonged to as Director of its Department of Economic Theory), on the occasion of the  Anniversary Symposium celebrating "50 years of Economics in Galicia".
The subject matter of the intervention, "Financial Regulation and Crisis", is analyzed in three sections:
    I The changing balance between Market and Public Interventions.
    II Post-crisis regulation.
    III Evaluation of the current situation.
The first section recalls how the powerful productive capacity of capitalism is not only shaped by the forces of the free market, but also by the public intervention (regulations, direct government intervention, etc.), with the relative importance of each of them shifting over time in a pendular-like dynamic.
The second section describes the various proposals for new financial regulation that arose as a reaction to the great crisis of 2008, classifying them into four main categories:
  A) Individual risk management
  B) Macroprudential regulation
  C) "Systemically important" banks
  D) Conflicts of interest.
Finally, the third section evaluates the current situation, concluding that it’s an improvement over the one existing prior to the financial crisis, but it is still far from immunizing the system against major future disturbances. Three reasons underly this conclusion:
  - It seems likely that the scope and reach of the new regulations will end up being significantly less than what was originally intended.
- It’s feasible that some gaps in the new regulations will eventually allow the very same factors that caused the previous crisis to once again introduce serious destabilizing influences.
  - Entirely new factors not envisioned by this regulation might end up triggering the next global crisis.

The article ends with an analysis of the distinction between "more" and "better" regulation, reflecting on "regulatory fatigue". It then explores the merits of reconfiguring the current approach and philosophy to developing new regulations, by truly incorporating cost-benefit analysis and impact assessments and reinforcing the transparency of the process to the public.
Only in this way, the article concludes, would the ultimate objective of creating a financial system that supports growth through the best combination of stability (imposed by the State) and the creative power of private initiative (channeled by the markets) be effectively served.

Resumen

Este artículo se corresponde con la conferencia que el Profesor Quintás-Seoane pronunció el 14 de abril de 2018 en la Universidad de Santiago de Compostela (a cuyo claustro perteneció como Director de su Departamento de Teoría Económica), con motivo del Simposio-Aniversario celebrando los "50 años de Economía en Galicia".
El tema objeto de la intervención, "Regulación Financiera y Crisis", se analiza a lo largo de tres secciones:
    I El cambiante equilibrio entre Mercado e Intervención Pública.
    II La regulación post-crisis.
    III Evaluación de la situación actual.
En la primera sección se recuerda que la poderosa capacidad productiva del capitalismo no está solo configurada por las fuerzas del libre mercado, sino también por la intervención pública (regulaciones, intervención directa gubernamental, etc.), con la importancia relativa de cada una modificándose a lo largo del tiempo de acuerdo con una dinámica pendular.
En la segunda sección se recogen las modificaciones propuestas de nueva regulación financiera que surgió como reacción frente a la gran crisis de 2008, encuadrándolas en cuatro grandes líneas:
  A) Gestión individual del riesgo
  B) La regulación macroprudencial
  C) Los bancos "sistémicamente importantes"
  D) Los conflictos de interés.
Finalmente, en la tercera sección, se evalúa la situación actual, concluyendo que, aunque es mejor que la existente previamente a la gran crisis, está muy lejos de haber inmunizado al sistema frente a la repetición de grandes perturbaciones. Y esto es así por tres motivos principales, detallados en el texto:
  - Parece probable que el alcance de la nueva regulación será significativamente menor que el que se pretendía inicialmente.
  - En cualquier caso, quedarán algunas brechas por las que los factores causantes de crisis anteriores podrían introducir graves influencias desestabilizadoras.
  - Pero, además, en tercer lugar, es muy cierto que pueden ser nuevos factores los que detonen una nueva crisis global.
 
El artículo finaliza con un análisis de la distinción entre "más" y "mejor" regulación, reflexionando sobre la "fatiga regulatoria" y la conveniencia de reconfigurar el sistema (y la filosofía) de producción de regulaciones, incorporando realmente el análisis costo-beneficio y la valoración de impactos, y reforzando la publicidad del proceso.
Sólo así, concluye el artículo, se serviría eficazmente al objetivo último de crear un sistema financiero que dé soporte al crecimiento mediante la mejor combinación de estabilidad (impuesta por el Estado) y el poder creador de la iniciativa privada (canalizada por los mercados).

This paper introduces macroprudential policy using a static New Keynesian Macroeconomics model with financial frictions. We analyze two related questions: First, we show how the pro-cyclicality of financial factors captured by the financial accelerator amplifies the transmission of supply and demand shocks and impacts the intuition we get from a basic intermediate macroeconomics. Second, adopting an optimal policy perspective, we show how a policymaker may use macroprudential policy to complete monetary policy measures. Following the Mundellian Policy Assignment principle, macroprudential policy should be specialized to address the pro-cyclicality problem to suppress welfare losses associated with the building of financial imbalances, thus helping monetary policy to concentrate on the output inflation trade-off.

After the global financial crisis of 2007, macroprudential policy instruments have gained in recognition as a crucial tool for enhancing financial stability. Monetary policy, fiscal policy, and microprudential policy operate with a different toolkit and focus on achieving goals other than the stability of the financial system as a whole. In light of this, a fourth policy-namely macroprudential policy-is required to mitigate and prevent shocks that could destabilize the financial system as a whole and compromise financial stability. The aim of this paper is to contrast macroprudential policy with other economic policies and explain why other economic policies are unable to attain financial stability, which in turn justifies the need for a separate macroprudential policy, the ultimate goal whereof is precisely financial stability of the financial system as a whole. Our research results

Macro-prudential thinking and its emphasis on endogenously created systemic risks, marginal in the banking regulation discourse until the mid-2000s, has become central post-crisis. This paper analyzes this intellectual shift by using  discourse and citation-network analysis of the most cited scholarly works on banking regulation and systemic risk from 1985-2014 and 6 in-depth interviews with central scholars. It demonstrates that the predominance of formalism, particularly partial equilibrium analysis, in studies on banking regulation pre-crisis impeded economists’ engagement with the endogenous sources of systemic risks discussed in the systemic risk sample. These studies excluded observed phenomena that could not be accommodated in mathematical models, largely ignoring contributions based on historical and practitioners’ styles of reasoning. Post-crisis, while informal analyses gain prominence in studies on banking regulation, attempts to conceptualize systemic risk as a negative externality indicate the persistence of formalism and equilibrium thinking and its concomitant epistemological limitations that stymie theoretical progress.

In the aftermath of the 2008 global financial crisis, the G20 heralded a macroprudential turn in financial regulation. This paper tries to contribute to the ongoing reflection on this paradigm change by focusing on its time dimension. It does so first by putting it in the perspective of an ideological history of financial regulation, and then by exploring reasons why this dimension failed to be implemented. The failure of this project is here related to its origins as a product of in-house economists of the BIS. The contradiction between the inherently political nature of this kind of regulation and its emergence as a purely technocratic project and the difficulty for a pro-market institution to endorse a strong and distinctive market regulation are both put forward.

This paper presents an overview of key proposals formulated by the European Systemic Risk Board (ESRB), the European Banking Authority (EBA) and the European Central Bank (ECB) in the context of the review of the macroprudential policy framework of the European Union (EU), aimed at improving its operation and efficiency over the medium term.

The policy framework on the countercyclical capital buffer (CCyB) and the capital conservation buffer (CCoB) is still in its early stages of implementation in the European Union (EU). Prior to the COVID-19 pandemic crisis, a general inaction bias prevailed among its Member States. The recent experience with emergency macroprudential relaxation measures in response to the pandemic shock highlighted the need for improved capital buffer usability. As the relevant framework heads towards a more mature phase, this paper discusses lessons learned from the use of buffers so far, recent findings regarding factors inhibiting their deployment and key suggestions on making the buffers fully usable in times of trouble, thus hoping to contribute to the macroprudential debate following the buffers' first stress event.

Macroprudential measures implemented in individual Member States may have cross-border or cross-sectoral repercussions. This special feature discusses cross-border spillover channels. To limit negative spillover effects, macroprudential instruments should be applied consistently across countries, and reciprocity agreements must be applied transparently.

This article explores how systemic risk has been governed at the international level after the financial crisis. While macroprudential ideas have been widely embraced, the policy instruments used to implement them have typically revolved more narrowly around the monitoring of risk posed by discrete 'systemically important' entities. This operational focus on individual entities sidelines the more radical implications of macroprudential theory regarding fallacies of composition, fundamental uncertainty and the public control of finance. We explain this tension using a performative understanding of risk as a socio-technical construction, and illustrate its underlying dynamics through case studies of systemic risk governance at the Financial Stability Board (FSB) and the International Monetary Fund (IMF or Fund). Drawing on official reports, consultation documents and archival sources, we argue that the FSB's and IMF's translations of systemic risk into a measurable and attributable object have undermined the transformative potential of the macroprudential agenda. The two cases illustrate how practices of quantification can make systemic risk seemingly more governable but ultimately more elusive.

Öz Küresel finansal krizin, finansal dengesizliklerle mücadelede geleneksel mak-roekonomik politika çerçevesinin yetersiz kaldığını açık bir şekilde ortaya koy-ması politika yapıcıları alternatif politika arayışlarına yöneltmiştir. Bu doğrultuda sistemik riskleri ve bunun neden olabileceği olumsuz dışsallıkları kontrol altına almak, olası şoklar karşısında finansal sistemin direncini güçlendirmek ve diğer iktisat politikalarının etkinliğini arttırmak amacıyla makro ihtiyati politikalar tanım-lanmıştır. Makro ihtiyati politikaların tanımlanması ile birlikte, para politikasının finansal sistemdeki gelişmeler karşısındaki tutumuna ilişkin geleneksel reaktif-proaktif politika tepkisi tartışması, finansal istikrarı sağlamaya yönelik politika çerçevesi tartışmasına dönüşmüştür. Kriz sonrası dönemde, politika yapıcıların finansal dengesizliklere proaktif tepki vermesi yönünde varılan uzlaşıya karşın bu tepkinin hangi politika veya politika bileşimi ile verileceği, politikalar arasındaki ilişkinin ve koordinasyonunun ne olacağı başlıca tartışma konularını oluşturmuş-tur. Bu çerçevede çalışma ile para ve makro ihtiyati politikaların farklı şekillerde yürütülebildiği finansal istikrara yönelik alternatif politika çerçevelerinin ortaya koyulması ve politika çerçevelerinin karşılaştırmalı analizinin gerçekleştirilmesi amaçlanmıştır. Abstract The fact that global financial crisis has showed clearly that the traditional macroeconomic policy framework is insufficient to fight against financial imbalances has led the policy makers to seek alternative policies. In this direction, in order to control systemic risks and the negative externalities caused by these risks, to strengthen the resistance of the financial system in the face of possible shocks and to increase the effectiveness of other economic policies, macro-prudential policies have been defined. With the definition of macroprudential policies, the traditional discussion of the reactive-proactive policy response regarding the monetary policy's attitude towards developments in the financial system has turned into a discussion of the policy framework for achieving financial stability. Despite the consensus on policymakers' proactive response to financial imbalances in the post-crisis period, 'which policy or policy composition will be provided with this response and what the relationship and the coordination between policies will be' have been the main discussion topics. In this context, it is aimed to provide alternative policy frameworks for financial stability in which monetary and macroprudential policies can be implemented in different ways, and to provide a comparative analysis of policy frameworks.