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Macroprudential policy

Macroprudential Framework for Banks

The EU's macroprudential framework aims to strengthen financial stability by implementing the Basel III standards and establishing robust monitoring and regulatory measures across the banking sector.


Key Components

  • Capital Buffers: Banks are required to maintain additional capital buffers above the minimum capital requirements to absorb shocks during financial stress.
  • National Measures: National authorities can introduce macroprudential measures, such as higher risk weights, stricter liquidity requirements, and limits on exposures, tailored to the specific risks in their banking sectors. These measures must be notified to the European Systemic Risk Board (ESRB).
  • Role of the ECB: In the banking union, the European Central Bank (ECB) assesses and can influence macroprudential measures adopted by national authorities to ensure consistency across the Single Market.
  • International Alignment: The framework aligns with international standards, particularly the Basel III framework, to ensure that the EU’s financial system is resilient and well-regulated.

Relevant legislation

The macroprudential framework for banks in the EU is primarily built upon several key pieces of legislation.

Below is a list of the main EU legislative acts related to this framework:

1. Capital Requirements Directive (CRD)
  • CRD VI - 2024/1619/EU: Latest update to the directive, setting out the framework for the regulation of credit institutions and investment firms, including macroprudential supervision.
  • CRD V - 2019/878/EU: Amended rules on capital requirements and macroprudential supervision, focusing on capital buffers and other macroprudential tools.
  • CRD IV - 2013/36/EU: Establishes prudential requirements for credit institutions and investment firms and outlines the role of macroprudential supervision.
2. Capital Requirements Regulation (CRR)
  • CRR III - 2024/1623/EU: Recent regulation that continues to build upon the macroprudential tools and supervision introduced in earlier regulations.
  • CRR II - 2019/876/EU: Enhances the macroprudential framework by introducing more granular capital requirements and leverage ratios.
  • CRR - 575/2013/EU: Original regulation setting out detailed prudential requirements for banks, including capital requirements and macroprudential measures.
3. Single Supervisory Mechanism (SSM) Regulation
  • Council Regulation (EU) No 1024/2013: Establishes the Single Supervisory Mechanism, granting the European Central Bank (ECB) supervisory responsibilities, including macroprudential oversight within the Eurozone.
4. Single Resolution Mechanism (SRM) Regulation
  • Regulation (EU) No 806/2014: Establishes the Single Resolution Mechanism for the orderly resolution of failing banks, complementing the macroprudential framework by ensuring stability during crises.
5. Bank Recovery and Resolution Directive (BRRD)
  • Directive 2014/59/EU (BRRD): Provides a framework for the recovery and resolution of credit institutions and investment firms, contributing to financial stability and macroprudential oversight.
6. European Systemic Risk Board (ESRB) Regulation
  • Regulation (EU) No 1092/2010: Establishes the ESRB, which monitors systemic risks to financial stability in the EU and coordinates macroprudential policies.

These legislative acts collectively form the foundation of the EU's macroprudential framework for banks, ensuring the stability and resilience of the financial system.

Macroprudential policies for non-bank financial intermediation (NBFI)

The European Union is committed to regulating the non-bank financial intermediation (NBFI), the shadow banking sector, aiming to mitigate systemic risks and enhance transparency. Shadow banking, involving credit intermediation outside the regular banking system, is significant due to its size and interconnectedness with the regulated financial sector.

Key Aspects of the EU's Approach to Shadow Banking:
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  1. Shadow Banking Overview:
    • Definition: Shadow banking includes activities and entities in credit intermediation outside of the traditional banking system.
    • Significance: It's a notable part of the financial system, comprising 25-30% of the total.
    • Concerns: The sector's operation outside regular banking regulations raises systemic risk concerns and potential for regulatory arbitrage.
  2. EU Reforms Post-Financial Crisis:
    • Since the 2007-2008 crisis, the EU has reformed its financial services sector.
    • The focus is on preventing risks from migrating to less regulated sectors.
  3. Communication on Shadow Banking (September 2013):
    • This roadmap aims to limit risks, especially systemic ones, in the shadow banking sector.
    • It was a follow-up to a green paper and stakeholder consultation on shadow banking.
  4. Proposal on Money Market Funds (MMFs):
    • MMFs, which invest in short-term debt, were identified as needing regulation.
    • The proposal aims to address risks associated with MMFs.
  5. Regulation on Securities Financing Transactions (SFTs):
    • Identified as needing better monitoring in the shadow banking system.
    • SFTs involve using securities as collateral in cash transactions and are crucial for funding in the EU.
    • In November 2015, the EU adopted the regulation on the transparency of SFTs (SFTR).
    • The SFTR introduces transparency, reporting, and disclosure requirements for institutions engaged in SFTs.


Relevant legislation

The macroprudential framework for Non-Bank Financial Intermediation (NBFI) in the EU is still evolving and is less developed than the framework for banks. However, there are several key pieces of legislation and regulations that address various aspects of NBFI, particularly focusing on systemic risks, financial stability, and oversight.

Here’s a list of the main EU legislative acts related to the macroprudential framework for NBFIs:

1. Alternative Investment Fund Managers Directive (AIFMD)
  • Directive 2011/61/EU (AIFMD): Regulates managers of alternative investment funds (AIFs) such as hedge funds, private equity funds, and real estate funds. It includes provisions for systemic risk monitoring and macroprudential oversight of large AIFMs.
2. Undertakings for Collective Investment in Transferable Securities (UCITS) Directive
  • Directive 2009/65/EC (UCITS IV): Establishes a regulatory framework for UCITS funds, which are a major component of non-bank financial intermediation. It includes provisions for risk management and oversight that contribute to financial stability.
3. European Market Infrastructure Regulation (EMIR)
  • Regulation (EU) No 648/2012 (EMIR): Regulates over-the-counter (OTC) derivatives, central counterparties (CCPs), and trade repositories. EMIR imposes clearing and reporting requirements on non-bank financial entities involved in derivatives markets, contributing to systemic risk management.
4. Money Market Funds (MMF) Regulation
  • Regulation (EU) 2017/1131 (MMFR): Establishes rules for money market funds (MMFs), which are a key component of NBFI. The regulation includes provisions to ensure the stability of MMFs, limit liquidity risks, and enhance transparency.
5. Securities Financing Transactions Regulation (SFTR)
  • Regulation (EU) 2015/2365 (SFTR): Enhances the transparency of securities financing transactions (SFTs), which are often used by non-bank financial entities. SFTR requires the reporting of SFTs to trade repositories, helping to monitor and mitigate systemic risks.
6. European Systemic Risk Board (ESRB)
  • Regulation (EU) No 1092/2010: Establishes the ESRB, which is responsible for macroprudential oversight of the entire financial system, including NBFIs. The ESRB monitors systemic risks arising from NBFI activities and can issue warnings and recommendations.
7. Financial Conglomerates Directive (FICOD)
  • Directive 2002/87/EC (FICOD): Regulates financial conglomerates that may include non-bank financial entities such as insurance companies and investment firms. FICOD addresses issues of systemic risk and financial stability within large, complex financial groups.
8. Insurance and Reinsurance (Solvency II) Directive
  • Directive 2009/138/EC (Solvency II): Establishes a robust prudential framework for insurance and reinsurance companies, which are significant players in the NBFI sector. Solvency II includes requirements for capital adequacy, risk management, and supervisory oversight.
9. Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation
  • Regulation (EU) No 1286/2014: Aims to enhance transparency and protect investors in the NBFI sector by standardizing the disclosure of information for investment products.
10. Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR)
These legislative acts form the core of the EU's macroprudential framework for non-bank financial intermediation, addressing various aspects of systemic risk, market transparency, and financial stability.

​Through these measures, the EU seeks to address the challenges posed by the shadow banking sector, aiming for a more stable and transparent financial system. This approach reflects a comprehensive strategy to safeguard the broader economy from potential risks originating in less regulated financial activities.