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Macroprudential supervision in the Eurozone: Beware of excessive expectations

There is a broad consensus that financial supervision ought to include a macroprudential perspective that focuses on the stability of the entire financial system. This column presents and critically evaluates the newly-created macroprudential framework in the Eurozone, with a particular focus on Germany. It argues that, while based on the right principles, the EU framework grants supervisors a high degree of discretion that entails the risk of limited commitment and excessive fine-tuning. Further, monetary policy should not ignore financial stability considerations and expect macroprudential policy to do the job alone.

The financial crisis of 2007-2009 strongly altered the view of regulation and supervision of financial institutions. Microprudential regulation and supervision – directed at the individual institution – had not prevented the crisis, but had contributed to it or at least made it worse (Hellwig 2009). Therefore, there is now a broad consensus that supervision ought to include a macroprudential perspective that focuses on the stability of the entire financial system rather than on individual institutions.

To this end, in the EU, a large number of new institutions and regulatory instruments have been created. This has resulted in a complex web of macroprudential supervisory structures and a large new toolkit, which has raised great expectations regarding the effectiveness of the new approach. This column presents and critically evaluates the newly created macroprudential framework in the Eurozone, with a particular focus on Germany. We make the following major suggestions:

  • In the Eurozone, macroprudential supervision should be integrated (comprising all sectors of the financial system), federally organised and located outside the ECB. Moreover, it should be combined with microprudential supervision.
  • At the national level, the influence of politics should be strictly limited.
  • To avoid delayed responses, commitment should be strengthened by gradually moving towards a more rule-based approach.
  • In view of the macroprudential tools’ uncertain and limited effectiveness, macroprudential supervision should rely on robust tools and avoid excessive fine-tuning.
  • Finally, macroprudential policy should not be overburdened and central banks should stand ready to deal with emerging threats to financial stability, especially when additional risks arise from monetary policy.

Weaknesses in current supervisory structures

The newly created macroprudential supervision in the EU appears rather complex due to the involvement of a large number of both new and existing players (see Figure 1). This is due to the fact that part of the European macroprudential supervisory architecture at EU level was established right after the financial crisis, while the macroprudential architecture of the Eurozone was significantly overhauled with the establishment of the Banking Union.

Figure 1. Actors of macropudential policy in Germany

At EU level, the European Systemic Risk Board (ESRB) has been in place as an integrated financial supervisor for macroprudential supervision since 2011. The ESRB's aim is to identify systemic risks and propose measures to eliminate them, employing warnings and recommendations, which are subject to a ‘comply or explain’ mechanism.

However, the ESRB is unlikely to be able to fulfil its extensive mandate, above all the handling of acute threats to financial stability. The decision-making body is too large and comprises too many representatives of different interests for it to be able to quickly react to systemic risks in a targeted manner. Moreover, the ESRB’s instruments are too weak to effectively execute corrective action in the event of an acute threat.

In the Eurozone, the ECB has significantly stronger macroprudential powers, although limited to the banking system. These powers refer not only to significant financial institutions directly under Single Supervisory Mechanism (SSM) supervision but also to all other institutions in countries participating in the SSM. Article 5 of the SSM Regulation provides for asymmetric powers of intervention. The ECB may – after consultation with the national supervisory authorities – tighten macroprudential measures but not ease them. It may only use those macroprudential tools specified within the framework of the CRD IV package.

Allocation of strong asymmetric powers of intervention to a central institution is desirable. On the one hand, central regulation can be optimal in the presence of major spillover effects (Sinn 2001). This provides a strong argument for a supranational authority which would also be less prone to direct national political influence. On the other hand, errors made in macroprudential supervision at supranational level may result in considerably higher costs for the EU than national supervisory errors (Besley and Coate 2003). Consequently, the national authority should be primarily responsible for national financial stability, as the individual country would bear the lion's share of the real economic costs itself. Hence, the implemented federal structure which follows the principle of subsidiarity seems well-suited in the EU context. In a similar vein, Acharya and Calomiris (2014) suggested a ‘two-level framework’ in a recent VoxEU contribution.

A fundamental problem of the newly created supervision at EU level is the considerable concentration of power within the ECB and the resulting conflicts of interest between supervision and monetary policy, which may be even more significant than with respect to microprudential supervision. Further, with the ESRB and the ECB, there are two institutions at the European and Eurozone level, respectively, with a mandate for supranational macroprudential supervision – with only the ESRB being set up as an integrated financial supervisor. Avoiding such replication seems advisable in the medium term. Finally, as the borders become increasingly blurred between the different areas of the financial system – banks, insurance companies and markets – there is a strong argument for establishing an integrated financial supervisor.

In addition, new players were created at national level. In Germany, the Financial Stability Committee (Ausschuss für Finanzstabilität, AFS) was created. It is presided over by the Federal Ministry of Finance (BMF) and comprises three members each from BMF, Deutsche Bundesbank, and BaFin, as well as one non-voting member representing the Federal Agency for Financial Market Stabilisation. The AFS is responsible for discussing matters relevant to financial stability and promoting collaboration of the institutions represented on the committee. It may issue warnings and recommendations to public institutions in Germany (but not to EU ones) which – as with the ESRB – are subject to a ‘comply or explain’ mechanism. The AFS is not responsible for using macroprudential tools; this is first of all the responsibility of the national supervisory authority, BaFin, and – due to its asymmetric intervention powers – of the ECB. Hence, the current structure fulfils the requirement of combining micro- and macroprudential supervision.

In Germany, the major criticism concerns the strong influence of politics. Conflicts of interest can arise in the AFS if warnings and recommendations are to be issued that would have a positive impact on financial stability but a negative impact on the economy (and thus on the likelihood of re-election of the parties in power). These conflicts of interest could reduce the effectiveness of the AFS, especially since BaFin is under the supervision of the Federal Ministry of Finance and would be unlikely to oppose it.


The new macroprudential supervisors were given a large toolkit. A series of regulatory instruments were introduced as part of Basel III for the banking sector, which is taking a pioneering role. New capital instruments have been designed in order to limit credit growth and leverage and thus to mitigate financial sector procyclicality. These will generally focus on the ratio of core tier 1 capital to risk-weighted assets. The time-varying counter-cyclical capital buffer, as well as the capital conservation buffer, is playing an important role here. Further, sectoral risk weights can be raised to prevent the build-up of risks in the real estate sector. An EU-wide harmonised leverage ratio is to be introduced in 2018 in addition to the risk-weighted capital requirement. It will provide a more robust measure than the risk-weighted capital ratio.

In addition to capital measures, the CRD IV package is also introducing liquidity requirements for banks in order to avoid excessive maturity mismatch and market illiquidity. This takes account of the fact that excessive maturity mismatch, sometimes by special purpose vehicles, was a major cause of the financial crisis. To prevent direct and indirect exposure concentrations, there is the instrument of limiting large exposures. Finally, new capital instruments have been created that provide for higher capital requirements for systemically important financial institutions and other non-cyclical systemic risks. These instruments are intended to reduce misaligned incentives and moral hazard in the financial system.

The instruments differ in terms of the supervisor's scope of discretion. Some instruments give the supervisor very little or no scope of discretion (for example, the leverage ratio, the capital conservation buffer, or liquidity rules). In other instances, the use of instruments is based on more or less formalised indicators, such as the credit gap in the case of the counter-cyclical capital buffer. There is particularly great flexibility in pillar 2 measures or national macro-flexibility, which are used on a purely discretional basis.

With the Basel III toolkit, the macroprudential supervisor has much flexibility to react to threats to systemic stability. The flip side of this flexibility is a lack of coherence in the measures across member states as well as a lower degree of transparency, particularly as regards pillar 2 measures. Moreover, the discretionary leeway reduces the commitment, which can result in delayed use of tools and which renders the implementation of unpopular measures unlikely.

Further it is questionable whether such a large number of instruments is actually needed. It allows regulators to react in a targeted way to existing problems. However, there is still considerable uncertainty regarding the effectiveness of the tools and their interaction with other tools (IMF 2013). This applies above all to tools for regulating cyclical risks, which should therefore initially be used with caution. The increasing experience with indicators, timing and dosage would allow for a stronger rule-based policy, which could help to avoid delays and create stronger commitment.

As is the case with microprudential regulation, there is the danger of excessive fine-tuning, which creates the illusion of precise control of risk while simultaneously creating room for interpretation and opportunities for avoidance (regulatory arbitrage). As with microprudential regulation, there are arguments in favour of creating robust mechanisms that are effective without demanding that each individual case be dealt with in a precise way. This includes, above all, a further increase in capital, which can cover many systemic risks and effectively reduces procyclicality. This does not rule out combining this requirement with a ‘breathing’ capital conservation buffer.


To summarise, the newly created macroprudential supervision in the EU is based on the right principles. The federal structure seems well-suited to the EU. However, in the Eurozone the concentration of powers at the ECB and the resulting conflict of interest between supervision and monetary policy can be dangerous. At national level, political influence should be strictly limited.

The large set of instruments and high degree of discretion allow supervisors to react in a flexible manner to threats to financial stability, but at the same time entail the risk of limited commitment and excessive fine-tuning. More robust measures would be preferable.

But even if institutional structures and the toolkit are improved, macroprudential supervision and regulation are not a panacea, which can guarantee financial stability at all times. It is important to develop efficient mechanisms for crisis management and especially bank resolution, which could themselves be interpreted as major macroprudential tools. First steps in that direction were taken in the Eurozone by establishing the Single Resolution Mechanism.

There is a considerable risk of overburdening macroprudential supervision, thereby disappointing the high expectations of policymakers and the wider public. This is all the more true when exceptional monetary policy measures may promote the creation of systemic risk. Given the limited and uncertain effectiveness of macroprudential instruments, monetary policy should not ignore financial stability considerations and expect macroprudential policy to do the job alone. Rather, central banks have to take the effects of their measures on system stability into account in their decisions and have to stand ready to deal with emerging threats to financial stability.

Disclaimer: The views expressed here are those of the authors and do not necessarily represent those of the institutions with which they are affiliated.


Acharya, V and C W Calomiris (2014), “A macroprudential policy framework for the EU and its member states”, Macroprudentialism, A VoxEU.org Book, edited by Dirk Schoenmaker.

Besley, T and S Coate (2003), “Centralized versus decentralized provision of local public goods: A political economy approach”, Journal of Public Economics, 87: 2611-2637.

German Council of Economic Experts (2014), Mehr Vertrauen in Marktprozesse, Annual Economic Report 2014/15, Wiesbaden. Chapter V: The long road to more financial stability in Germany and Europe.

Hellwig, M (2009), “Systemic risk in the financial sector: An analysis of the subprime-mortgage financial crisis”, De Economist 157: 129-207.

IMF (2013), The interaction of monetary and macroprudential policies, International Monetary Fund, Washington, DC.

Sinn, H W (2001), The new systems competition: A construction principle for Europe, Blackwell Publishing, Malden.

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