The essay describes the legal framework for making and implementing macroprudential policy in the European Union, introduced after the financial crisis of 2007-2009 and modified with the euro crisis starting in 2011. As frame of reference, these rules are compared with the reforms enacted by the Dodd-Frank Act in the United States.
The paper discusses the main issues in the creation of a framework for macroprudential supervision and recounts the main strands of the debate. The focus is on the institutional, legislative and regulatory aspects of macroprudential supervision, conceived as a comparatively new technique for addressing systemic risk.
The design of the macroprudential framework involved, first, a shift of powers to the federal level as institutional answer to the global challenge of systemic risk, and second, defining the place of macroprudential policy within the mandate of central banks.
The paper first sketches the features of macroprudential policy and then traces the need for a legal framework for macroprudential policies to the financial crisis of 2007-2009.
The Dodd-Frank Act in the United States set out the main guidelines for macroprudential action: the institution of a dedicated public body supported by a central database, the identification of the main nodes where that body should intervene, and the broader structural reforms needed to avoid the repetition of market failures.
The European Union created its own supervisory network (the European System of Financial Supervision - ESFS), establishing the three European Supervisory Authorities (ESAs) and the European Systemic Risk Board (ESRB). The ESRB is controlled by the EU central banks, with jurisdiction over the entire EU financial system; it oversees systemic risk and issues warnings and recommendations to the competent authorities within the Union. The ESRB's oversight is matched by the regulatory and supervisory competences of the three ESAs, creating a wide set of controls.
The ESRB has worked to foster sensitivity to the macroprudential approach, in part by calling for a more comprehensive and more effective macroprudential framework: it has specified the characteristics of the mandates of the national macroprudential authorities, which should join to counter systemic risk at national level, and identified a set of core macroprudential instruments.
The euro crisis highlighted the urgent need to step up supervisory action against financial instability in the euro area. In response, the European Union established its Single Supervisory Mechanism, centred on the European Central Bank, and gave the ECB macroprudential powers over the banking sector, in parallel with national powers. Since the mechanism operates only within the euro area, the paper also assesses its macroprudential interaction with the ESRB.
