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Macroprudential tools

Macroprudential tools can be broken down into soft, medium and hard tools depending on the legal depth of intervention and strength of binding capacity. Soft instruments comprise communication on developments germane to financial stability and emerging risks. This is accomplished in particular via regular publications, such as annual reports, but also via speeches and interviews. Macroprudential tools with medium depth of intervention and strength of binding capacity are "warnings" and "recommendations". Both the ESRB and G-FSC can use these instruments to formally warn of financial stability risks and recommend measures for combating these risks. Recipients of ESRB warnings and recommendations can be, in particular, the European Union as a whole, the European Commission, the governments and financial supervisors of the EU member states and European supervisory authorities. The G-FSC can issue warnings and recommendations to all German public sector entities.

Recommendations can lastly provide for the deployment of hard (binding) macroprudential tools which intervene directly in the business activities of financial market players. European and German laws and regulations currently make it possible to deploy hard macroprudential regulatory instruments, especially in the banking industry. The majority of these instruments are designed to strengthen credit institutions' capital base. These include, for instance, capital buffers for systemically important institutions as well as the systemic risk buffer. The first one shall enhance the resilience of banks by raising their loss absorbing capacity, where the latter is particularly designed to reduce the risk of one bank's financial distress spreading to other credit institutions. Supervisors can impose higher capital requirements on banks in upturn periods by laying down a countercyclical capital buffer, thus increasing their resilience in the event of a subsequent downturn. Once such a downturn occurs, the credit institutions can then deplete their previously accumulated buffers in order to cover any losses.

Upon the launch in November 2014 of the Single Supervisory Mechanism (SSM) for banks in Europe, the ECB was given not only prudential supervisory powers but also the power to undertake macroprudential intervention in those member states participating in the SSM. Although it is still primarily the national competent authorities (NCAs) which decide on the application of macroprudential tools, the ECB can impose or intensify certain national macroprudential measures.