Documents considered by the Committee on 13 December 2017 Contents

11European Systemic Risk Board

Committee’s assessment

Politically important

Committee’s decision

Not cleared from scrutiny; further information requested

Document details

Proposal for a Regulation amending Regulation (EU) No 1092/2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board

Legal base

Article 114 TFEU; ordinary legislative procedure; QMV

Department

Treasury

Document Number

(39055), 12430/17 + ADD 1, COM(17) 538

Summary and Committee’s conclusions

11.1In 2010, the EU created the European Systemic Risk Board (ESRB) as the macro-prudential pillar of the post-crisis European System of Financial Supervision (ESFS). The Board monitors the build-up of risks in the EU’s financial system, and issues warnings and recommendations to national and EU regulators if it believes action is necessary to preserve the stability of that system.

11.2In September 2017, the European Commission proposed a number of technical changes to the composition and functioning of the ESRB to reflect the new legislative environment (in particular the creation of the Banking Union for the Eurozone),119 and the anticipated increases in cross-border flows of capital as part of the Capital Markets Union.120 The proposed changes are set out in paragraph 11.14 below. In parallel, the Commission also tabled plans for much more substantial reforms of the European Supervisory Authorities, which are the micro-prudential counterpart of the ESRB within the ESFS.121

11.3The Economic Secretary to the Treasury (Stephen Barclay) submitted an Explanatory Memorandum on the proposal in October 2017.122 In it, he briefly summarises the proposed changes to the ESRB Regulation, but does not state the Government’s position on them.

11.4The Commissions proposals on the European Systemic Risk Board are technical in nature and uncontroversial, especially compared to the much more substantial reforms it has proposed in parallel on the powers and governance of the micro-financial European Supervisory Authorities. However, the Minister has failed to provide us with any information about the Government’s position on the proposed changes to the ESRB.

11.5Moreover, although the Bank of England will lose its seat and voting rights on the European Systemic Risk Board when the UK ceases to be an EU Member State, the exact implications of that are unclear. The Minister has not provided an assessment of the value of the ESRB’s work for the UK, and in particular for the Financial Policy Committee of the Bank of England, which performs a similar function to the ESRB at UK-level.

11.6As such, we are unable to clear the proposal from scrutiny. We ask the Minister to write to us with the Government’s position on the changes to the ESRB, and its proposals for cooperation between the Board and the Bank of England after Brexit. In particular, we are interested in the Government’s view on how the Bank of England’s cooperation with the ESRB could be institutionalised after Brexit. We ask him to provide this information by 12 January 2018, after which we will consider this proposal again.

Full details of the documents

Proposal for a Regulation amending Regulation (EU) No 1092/2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board: (39055), 12430/17 + ADD 1, COM(17) 538.

Background

The European System of Financial Supervision

11.7The EU made major changes to the supervision of the financial markets of its Member States in response to the 2008 financial crisis. It introduced a Single Rulebook for financial regulation in Europe, and created the European System of Financial Supervision (ESFS). The ESFS is built on a two-pillar system of macro-prudential and micro-prudential supervision. At EU-level, these pillars consist of the European Systemic Risk Board123 and the European Supervisory Authorities (ESAs) respectively. At Member State level, the ESFS is the responsibility of the relevant domestic financial authorities.124 The EU-level institutions became operational in 2011.

Reform of the European Systemic Risk Board

11.8The primary tasks of the European Systemic Risk Board (ESRB), which is responsible for macro-prudential oversight of the financial system in the EU,125 are:

11.9The ESRB is located in Frankfurt, and its Secretariat is provided by the European Central Bank (ECB). The Board has no binding powers; instead, it issues warnings to identify systemic risks in the financial system, and making recommendations to the EU Member States’ domestic macroprudential regulators on remedial actions to be taken to mitigate those risks. It also works closely with the EU’s micro-prudential European Supervisory Authorities and international financial organisations.

11.10The ESRB has a broad membership. Its voting members include primarily the EU’s 28 national central banks (including, for the UK, the Bank of England), the European Central Bank, the European Commission and the European Supervisory Authorities. It normally takes decisions by simple majority, with each voting member have a single, unweighted vote.126

11.11The European Commission carried out a comprehensive evaluation of the ESFS in recent years. It primarily highlighted concerns about the governance and effectiveness of the ESAs, including the implications of Brexit, which we have considered in a separate chapter in this Report.127 With respect to the ESRB, the Commission concluded some technical changes were needed to adapt the Board to recent legislative developments, and to make its functioning more efficient. It tabled a legislative proposal to that effect in September 2017.

The Commission proposals

11.12The European Commission argues that the institutional changes related to Banking Union, which concentrated supervisory responsibility for large Eurozone banks within the European Central Bank, and efforts to build a Capital Markets Union, make the context in which the ESRB was set up different from the one in which it now operates in. In particular, the Commission is concerned that the Board should be able to address the potential risks that arise from increased cross-border flows of capital within the EU.

11.13As part of its package of reforms for the ESFS, the European Commission has proposed a series of changes to the composition of the European Systemic Risk Board (ESRB) and how it cooperates with European institutions. The proposed changes aim to “improve the ESRB’s efficiency and effectiveness, improve coordination of macroprudential policies within the EU, and enable the ESRB to play a key role in the further development of the Capital Markets Union”.

11.14The proposed changes to the set-up and functioning of the ESRB are mainly of a technical nature. They include:

11.15The Commission explains that “the underlying structure of the ESRB will remain broadly unchanged”.

The Government’s view

11.16The Economic Secretary to the Treasury (Stephen Barclay) submitted an Explanatory Memorandum on the proposal on 16 October 2017.129 In it, he briefly summarises the proposed changes to the ESRB Regulation, but does not state the Government’s position on them.

Previous Committee Reports

None.


119 The Banking Union consists primarily of Regulation 1024/2013 establishing the Single Supervisory Mechanism and Regulation 1093/2013 establishing the Single Resolution Mechanism. A proposal for a pan-Eurozone deposit guarantee scheme remains under discussion but is unlikely to be adopted in the near future (see our predecessors’ Report of 7 September 2016). The UK does not participate in the Banking Union.

120 The aim of the Capital Markets Union (CMU) is to increase EU businesses’ access to non-bank finance from other Member States.

121 See chapter 9 of this Report.

122 Explanatory Memorandum submitted by HM Treasury (16 October 2017).

123 See Regulation 1092/2010, cleared from scrutiny on 19 November 2009.

124 In the UK, the participating national competent authorities (NCA) are the Bank of England and the Prudential Regulation Authority, the Financial Conduct Authority, and the Pensions Regulator.

125 See Regulation 1092/2010, cleared from scrutiny on 19 November 2009.

126 A majority of two-thirds of the votes cast is required to adopt a recommendation for remedial action, or to make a warning or recommendation public.

128 The President of the ECB, Mario Draghi, is already Chair of the ESRB. However, under article 20 of the current ESRB Regulation, the European Commission had to review “the modalities for the designation or election of the Chair”.

129 Explanatory Memorandum submitted by HM Treasury (16 October 2017).




15 December 2017