A major cause of the financial crisis was an underestimation of vulnerabilities inherent in the global financial system. Although in the run-up to the crisis, warnings came in from several directions against the risks of financial innovations, excessive debt creation and rapidly rising house prices, the implications for the stability of the financial system were insufficiently heeded. On the one hand, the underestimation of systemic risks was caused by a lack of insight into the interdependencies existing within the financial system. On the other, supervisors were often unable to act against the risks they did see for lack of a sufficient mandate and adequate powers, or of political will.
Macroprudential policy framework needed besides stricter supervision
In response to the crisis, stricter requirements are being imposed on banks’ capital and funding. However, sound financial institutions cannot guarantee the overall soundness of the financial system. Besides supervision of individual institutions, there is a need for a macroprudential policy framework that explicitly targets systemic risks. Rather than the solvency of an individual bank, such policy aims to enhance the overall resilience of the financial system and to counteract risk accumulation. The difference between the two is important. Amid strongly rising house prices, for instance, a supervisor can only demand an individual bank to hold extra buffers if it can demonstrate that house prices pose a risk for that particular bank. A macroprudential policy framework may counter the escalation of such systemic risks by requiring industry-wide tightening of credit standards. In addition, the scope of macroprudential policy includes more than just the supervised financial institutions: it targets the entire financial system.
On the euro area level, the need for macroprudential policy is the more urgent because individual euro countries are unable to use monetary policy to counter national imbalances. Ireland and Spain, for instance, might have used macroprudential policies to counteract the local housing bubbles.
Allocating the macroprudential mandate is a necessary first step ...
Macroprudential policy can only be put into practice if the responsibility for its implementation is laid down in national legislation. Risks to financial stability are in many cases ‘tail risks’, characterised by low probability of a major event. As the benefits of macroprudential policy are largely hidden, the sometimes painful measures are likely to meet with strong resistance. An explicit mandate will act as a strong incentive for authorities to take action when necessary. Such a statutory mandate must be accompanied by adequate powers to enable authorities to monitor systemic risks and to take adequate measures. The countercyclical capital buffer for banks and tougher supervisory requirements for systemic institutions have been important first steps towards a fully functional set of macroprudential policy instruments.
Internationally, a great deal of effort has been made these past two years towards implementing this lesson from the crisis. The UK and the United States are among the countries that have set up a national macroprudential authority. At the EU level, the European Systemic Risk Board (ESRB) has since early 2011 been mandated to analyse systemic risks and to recommend countermeasures. On 16 January 2012, in order to ensure that all EU Member States act to implement macroprudential policies, the ESRB issued recommendations regarding the design of such national policies. In it, the ESRB urges the Member States to encase the responsibility for macroprudential policy in their national legislation.
... which the Netherlands should take as well
The Netherlands, too, should act to implement a macroprudential policy framework in order to enhance the stability of the financial system. The matter is the more urgent given the size and systemic importance of the Dutch financial sector. In addition, the current high mortgage indebtedness of Dutch households shows how procrastination in taking measures may result in an accumulation of vulnerabilities. Well-institutionalised macroprudential policy may go a long way to preventing such an escalation of difficulties.
A major role for DNB in macroprudential policy in the Netherlands will mesh well with its current mandate. As a central bank, DNB possesses the necessary expertise on macroprudential analysis and systemic risks. Furthermore, as a prudential supervisor, DNB is intimately familiar with the financial sector and already has regulatory instruments at its disposal. The imposition of measures targeting the financial system as a whole is impeded, however, by the current lack of a statutory mandate in respect of systemic risks. The Dutch Court of Audit (Algemene Rekenkamer) supports this view in a recent report, where it states that ‘the Wft and the Bank Act are inconclusive about DNB’s duty to support the stability of the financial system and the associated powers and authority.’
In light of the recent ESRB recommendation and the concrete macroprudential instruments currently in the making, DNB’s statutory duties need to be clarified at short notice. Only then will DNB – together with other relevant authorities – be able to take concrete steps to implement macroprudential policy in the Netherlands.