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FINANCIAL STABILITY REPORT 27 – JUNE 2014 83
1
Banking crises such as the latest finan-
cial crisis of 2008–09 have a major
impact on the real economy, reveal
fragilities in financial markets and shed
light on (often severe) gaps in banking
regulation and supervision. Obviously,
during the current crisis, banks had
inadequate capital and liquidity buffers
to absorb shocks. At the moment, a
reform of microprudential regulation is
well under way within the framework
first established more than 25 years ago
by the Basel Capital Accord. However,
recent literature on the economics of
banking regulation highlights that a
more innovative approach is required
to deal with the three main crisis cata-
lysts as revealed by the current finan-
cial crisis:2
• The financial system has become sub-
stantially more interconnected and
complex over the last twenty years.
In addition, more complex contagion
channels have emerged (e.g. derivative
exposures), and shocks can now spread
throughout the global financial system
almost immediately.
• The adverse impact of the financial
system’s inherent cyclicality on finan-
cial stability was severely underesti-
mated.
• Many banks today are too big to fail.
They cannot exit the market without
causing substantial negative externa-
lities for other financial institutions
and the real economy. As a conse-
quence, they are bailed out by the
public sector if necessary.3 This implicit
government guarantee leads to severe
incentive problems, which in turn
result in an inefficient allocation of
capital and risk within the economy.
At the European level, these issues are
addressed i.a. by the Bank Recovery
and Resolution Directive (BRRD), the
Single Resolution Mechanism (SRM), the
Macroprudential Supervision: A Key Lesson
from the Financial Crisis
In this paper we argue that the introduction of macroprudential supervision constitutes the
key lesson from the crisis for financial regulation and supervision. We discuss the complex
legal and institutional frameworks of macroprudential supervision in Austria and in the EU. In
Austria, we identify room for improving the current institutional setup, e.g. by enhancing the
role of the supervisory authority and the central bank, def ining a comprehensive macro-
prudential strategy (including a communication strategy) and implementing an internal gover-
nance structure that avoids blameshifting among the relevant institutions. At the EU level, we
find that the ongoing macroprudential review should address the politico-economic challenges
posed by the wide-ranging macroprudential powers of the Single Supervisory Mechanism
(SSM) to ensure adequate political control. Moreover, we show that traditional microprudential
instruments (e.g. Pillar 2) are conceptually ill-suited to pursue macroprudential objectives. We
therefore suggest prioritizing macroprudential measures over Pillar 2 measures in the ongoing
macroprudential review.
JEL classification: E58, E61, G28
Keywords: Financial stability, systemic risks, macroprudential supervision, regulation, super-
vision, policymaking
Judith Eidenberger,
David Liebeg,
Stefan W. Schmitz,
Reinhardt Seliger,
Michael Sigmund,
Katharina Steiner,
Peter Strobl,
Eva Ubl1
1 All authors: Oesterreichische Nationalbank, Financial Stability and Macroprudential Supervision Division.
Corresponding author: stefan.schmitz@oenb.at. The authors wish to thank Susanne Steinacher (OeNB) for helpful
comments and valuable language support.
2 See High Level Group on Financial Supervision in the EU (2009) and Nowotny (2013).
3 For an analysis of the negative long-term financial stability effects of EU bailouts, see Posch et al. (2009).
Macroprudential Supervision: A Key Lesson from the Financial Crisis
84 OESTERREICHISCHE NATIONALBANK
Single Supervisory Mechanism (SSM),
the Capital Requirements Directive IV
(CRD IV) and the Capital Requirements
Regulation (CRR).4 The CRD IV and
the CRR are of particular importance
as they introduce EU-wide macropru-
dential supervision by offering a new
set of instruments and an elaborate
institutional framework to proactively
address system-wide risks in the banking
sector.
The objective of macroprudential
supervision is to contribute to the
stability of the financial system as a
whole, which requires strengthening
the resilience of financial intermediaries
and of the financial infrastructure, and
limiting the buildup of systemic risks in
the economy (e.g. house price bubbles).
Ultimately, macroprudential supervision
aims at safeguarding the sustainable
contribution of the financial sector to
economic growth (ESRB, 2011). Macro-
prudential supervision complements
microprudential supervision, monetary
policy and fiscal policy.5
This paper is structured along the
following lines. First, we analyze the
costs of banking crises. Second, we
present the legal and institutional frame-
work of macroprudential supervision in
Austria and the EU. The third section
summarizes the available policy instru-
ments, and the forth section addresses
the main challenges of macroprudential
impact assessments. The final section
concludes.
1 Macroprudential Supervision:
An Indispensable Counterpart
to Microprudential Supervision
Financial crises usually entail substantial
costs for the economy – in terms of
both output losses and fiscal costs.
Banking crises that follow excessive
credit growth tend to last longer and
have bigger (negative) real and fiscal
impacts (Claessens and Kose, 2013) than
other banking crises. Using data pro-
vided by Laeven and Valencia (2012),
we derive that, on average, banking
crises6 cause an output loss of 32% of
GDP and fiscal costs of 8% of GDP
in the first three crisis years (see the
left-hand bars in chart 1). But banking
crises following excessive credit growth
are even more costly: They entail
output losses that are more than twice
as high and fiscal costs that are even
three times as high (see middle bars of
chart 1) as the comparable losses and
costs caused by banking crises that do
not follow a credit boom (right-hand
bars)7.
With its focus on individual banks,
a pure microprudential policy frame-
work is not able to address systemic
risk adequately as it only allows super-
visors to tackle idiosyncratic risk at the
level of individual banks (via Pillar 2
measures)8. To deal with the increasing
risk exposure in the entire banking
system, supervisors would have to turn
to the legislator to adapt micropruden-
tial regulation. In general, however, the
4 For an overview, see European Commission (2014a).
5 For more details on complementarity and conflicts with other policy areas, see e.g. Liebeg and Posch (2011).
6 The selected sample consists of 35 systemic banking crises in EFTA countries from 1977 to 2008, which is a
subsample of the data provided by Laeven and Valencia (2012). The authors define a systemic banking crisis as
a situation that meets two conditions: (1) the banking system shows signs of significant financial distress (as
indicated by significant bank runs, losses in the banking system and/or bank liquidations) and (2) significant
banking policy intervention measures are taken in response to significant losses in the banking system.
7 Laeven and Valencia (2012) define credit boom years as years in which the deviation of the credit-to-GDP ratio
relative to its trend is greater than 1.5 times its historical standard deviation and its annual growth rate exceeds
10%, or as years in which the annual growth rate of the credit-to-GDP ratio exceeds 20%.
8 Pillar 2 refers to the supervisory review that links a bank’s risk profile, risk management and risk mitigation
systems to its internal capital planning.
Macroprudential Supervision: A Key Lesson from the Financial Crisis
FINANCIAL STABILITY REPORT 27 – JUNE 2014 85
legislative process takes too long for any
such adaptations to be effective in due
time, e.g. against a house price bubble.
With the full harmonization of EU
banking regulation required under the
CRD IV and the CRR, adapting national
microprudential regulation to address
temporary systemic risk within a Mem-
ber State has become even less of an
option. Macroprudential supervision,
by contrast, provides some national
discretion to allow Member States to
identify potential systemic risk at the
national level and to intervene well
before it materializes. The macropru-
dential toolbox contains measures that
reduce the probability and the impact
of future banking crises.
2 Macroprudential Supervision as
a Fundamental Innovation in
Financial Supervision
Considering the introduction of the
SSM, which aims to centralize banking
supervision at the supranational level, it
might seem somewhat surprising that the
primary competence in macroprudential
supervision rests with the Member States.
Financial cycles vary between Member
States, as the crisis aptly demonstrated,
and the full harmonization of EU micro-
prudential regulation under the CRR
restricts Member States’ ability to deal
with this heterogeneity. This, in turn,
gives rise to politico-economic tensions
at the EU level: On the one hand,
Member States should be equipped with
the appropriate tools to address coun-
try-specific systemic risk (e.g. national
house price bubbles); on the other hand,
such national peculiarities must not be
misused to undermine the full harmo-
nization of banking regulation across
the EU. Therefore, national macropru-
dential supervision is embedded in a
complex institutional framework at the
EU level: Under certain conditions, the
European Systemic Risk Board (ESRB)9,
the European Banking Authority (EBA),
the European Parliament, the European
Commission and/or the Council have
to be notified of individual macropru-
dential measures taken by the Member
States. In some cases, these institutions
have the right to object to national
measures. In addition, any potential
national inaction bias could be mitigated
by the powers of the SSM, which, in
case of inaction or insufficient action at
the national level, may top up measures
taken by, or even take measures in lieu
of, the national designated authorities
(NDAs). Moreover, the ESRB may also
intervene in case of inaction by issuing
recommendations and warnings.
This new legal framework has been
set up to provide financial supervisors
with the power and tools to address
9 The ESRB is part of the European System of Financial Supervision (ESFS). Its purpose is to oversee financial
system stability in the EU. For more details on the institutional setup in Austria and the EU, see e.g. Liebeg and
Trachta (2013).
% of GDP
50
40
30
20
10
0
Output loss Fiscal cost
The Cost of Banking Crises
Chart 1
Source: Laeven and Valencia (2012), OeNB.
Note: Output loss is computed as the cumulative sum of the differences
between actual and trend real GDP during the first three years of
a crisis, expressed as a percentage of trend real GDP.
Nitou Fisca l costs are define d as the component of gross fiscal outlays
related to financial sector restructuring. They include fiscal costs
associated with bank recapitalizations but exclude asset
purchases and direc t liquidity assis tance from the Treasury.
All banking crises Crises with credit boom
Crises without credit boom
32
8
47
14
22
5
Macroprudential Supervision: A Key Lesson from the Financial Crisis
86 OESTERREICHISCHE NATIONALBANK
systemic risk in a timely and effective
manner. The NDA, for instance, may
increase capital requirements for all
banks within its jurisdiction – a right
that has so far been reserved to national
and EU legislation. Within the frame-
work of macroprudential supervision,
public sector officials are granted the
power to infringe individual property
rights. As such, the new framework
represents a major politico-economic
innovation in financial supervision at
the national level. Prior to the intro-
duction of macroprudential supervision,
the right to increase minimum capital
requirements (and similar minimum
regulatory requirements) was strictly
reserved to national legislation (within
EU law). To reconcile the need for
timely and effective intervention in the
buildup of systemic risk and the protec-
tion of property rights, the Member
States developed institutional frame-
works that aim at ensuring the political
control of macroprudential supervision.
In this context, Austria established
the Financial Market Stability Board
(FMSB) in 2014. All relevant national
financial stability stakeholders are rep-
resented on the FMSB: the Federal
Ministry of Finance, the Austrian Fiscal
Advisory Council, the Austrian Finan-
cial Market Authority (FMA) and the
Oesterreichische Nationalbank (OeNB).
The FMSB may issue recommendations
to the FMA, release warnings on
questions of systemic risk and publish
its decisions and warnings. The FMA is
the Austrian NDA, but the Ministry of
Finance has to formally approve most
macroprudential measures the FMA
takes. The OeNB plays a pivotal role
within the Austrian macroprudential
supervision framework. It is responsible
for identifying prospective systemic risk
and for providing the analytical under-
pinning of macroprudential measures
(including impact assessments of policy
measures). In addition, it provides the
secretariat to the FMSB.
These rather complex decision-mak-
ing structures aim at ensuring account-
ability, legitimacy and transparency in
the face of such extensive powers.10
The dominant role of the Ministry of
Finance is intended to ensure the politi-
cal control of independent institutions
like the OeNB and the FMA. Account-
ability and transparency are increased
by the fact that the FMSB reports to
Parliament. However, we regard these
safeguards as incomplete. To become
more transparent and effective, the
FMSB should develop a comprehensive
communication strategy. This includes
making its deliberations public by issu-
ing regular press statements and the
minutes of its meetings, providing infor-
mation about its regular assessments of
key risks and giving reasons for or
against taking action. Even then, the
FMSB’s complex structure and compo-
sition might induce an additional inac-
tion bias and allow for blameshifting
among the relevant players. To mitigate
this risk, a clear internal governance
structure including the aforementioned
communication strategy is called for.11
Finally, assigning a more prominent
role to the central bank and the super-
visory authority would align Austria’s
institutional framework for macro-
prudential supervision with the respec-
tive ESRB recommendation and inter-
national best practice. Currently, the
FMA and the OeNB each nominate
only one of six members to the FMSB,
while the Ministry of Finance nomi-
10 See IMF (2013).
11 Here we draw on the recommendations the Financial Stability Board (FSB) made in its peer review on macro-
prudential supervision in Germany, which has a very similar institutional structure (FSB, 2013).
Macroprudential Supervision: A Key Lesson from the Financial Crisis
FINANCIAL STABILITY REPORT 27 – JUNE 2014 87
nates two, which are the FMSB chair
and vice-chair (with a casting vote).
The Ministry of Finance also nominates
one member of the Fiscal Advisory
Council to participate in the FMSB,
while the sixth FMSB member is the
chair of the Fiscal Advisory Council.
3 Challenging Objective Requires
Comprehensive Set of
Instruments
Macroprudential supervision is still in
the early stages of development.12 Cur-
rently, its main focus is on the banking
sector, although its scope is wider. Its
ultimate objective of ensuring financial
stability is to be reached via five inter-
mediate objectives (ESRB, 2013):
• mitigating excessive credit growth,
which is a key driver of financial crises,
and reducing leverage, which is a
crisis amplifier,
• avoiding excessive maturity mismat-
ches that cause unstable funding,
• preventing direct and indirect expo-
sure concentrations to reduce vulne-
rabilities to common shocks,
• addressing negative incentives that
lead to moral hazard, and
• strengthening the resilience of finan-
cial market infrastructures.
To avoid situations in which individual
instruments become subject to conflict-
ing intermediate objectives, macropru-
dential supervisors aim at having at
least one instrument at their disposal to
tackle each of these intermediate objec-
tives. Consequently, effective macro-
prudential supervision is based on a
comprehensive and complementary set
of instruments. Some of these e.g.
address banks’ balance sheet structure
by requiring higher capital buffers. Oth-
ers put limits on the terms and condi-
tions governing new loans, e.g. by
defining maximum values for loan-to-
value and loan-to-income ratios. Finally,
macroprudential supervisors may address
inappropriate incentive structures by
capital surcharges and stricter public
disclosure requirements.
The key instruments in this context
are probably the different types of capi-
tal buffers specified in the CRD IV: the
countercyclical capital buffer (CCB),
the global systemically important insti-
tutions (G-SII) buffer, the other systemi-
cally important institutions (O-SII)
buffer and the systemic risk buffer
(SRB). In Austria, this capital buffer
regime is transposed into national law
by Articles 23 to 23d Austrian Banking
Act. What these capital buffers have in
common is that they are applied on top
of the minimum capital requirements
and that they must be held in core
equity tier 1 (CET1) capital. In principle,
they can also be combined; however,
there are certain limitations to such
combinations to ensure a floor or cap
on the aggregate impact of macropru-
dential measures on specific credit
institutions, both at the consolidated
and subsidiary levels.13 If a credit insti-
tution fails to meet its combined buffer
requirement, restrictions on dividend
payouts will apply and a capital conser-
vation plan has to be prepared.
The CCB (Article 130 CRD IV) is
designed to smooth the pronounced
cyclicality in the financial system. During
a phase of excessive credit growth,
additional capital requirements can be
imposed on banks, which are then
released again during a phase of weak
credit supply. The CCB aims at damp-
12 Nevertheless, a number of Member States have already announced or imposed measures of macroprudential super-
vision (e.g. Belgium, Croatia, the Netherlands and Sweden). See Box 3 – Overview of Macroprudential Measures
in the EU, in this issue.
13 See ESRB (2014b) for more details on tools addressing systemically important banks and structural systemic risks.
Macroprudential Supervision: A Key Lesson from the Financial Crisis
88 OESTERREICHISCHE NATIONALBANK
ening excessive credit growth during
an upturn and at avoiding excessive
credit supply restrictions during a down-
turn. The competent authorities have
to follow a set of principles and calcu-
late a reference rate as a benchmark to
guide their judgment in determining
whether credit growth is excessive.
According to this benchmark, the CCB
will usually be set at a rate of between
0% and 2.5% of risk-weighted assets,
but it could be higher than that under
certain circumstances.
The G-SII and the O-SII buffers
(Article 131 CRD IV) apply to credit
institutions which are systemically im-
portant at the global or domestic level,
respectively. Shocks to such institutions
are likely to cause contagion within
the respective financial system and to
produce serious negative consequences
for the real economy. As of 2016, it will
be possible to set the capital surcharge
for G-SIIs at between 1% and 3.5% of
risk-weighted assets. The introduction
of the O-SII buffer empowers authori-
ties to impose capital charges of up to
2% on systemically important institu-
tions that are not identified as G-SIIs.
To promote common supervisory prac-
tice, the EBA will publish guidelines on
how to identify O-SIIs.
The SRB (Article 133 CRD IV)
addresses structural systemic risks. It can
be applied to all banks or to a subset of
banks starting from 2014. It does not
have a cap. If imposed, its capital sur-
charge is at least 1% of risk-weighted
assets. Capital surcharges that exceed
3% need to be authorized by the Euro-
pean Commission, however.
Finally, Article 458 CRR empowers
NDAs to raise microprudential require-
ments if systemic risk increases and is
found to have the potential to seriously
damage the real economy. However,
Article 458 CRR requires an explanation
as to why such measures are deemed to
be suitable, effective and proportionate.
Microprudential requirements may only
be raised if all other available measures
are found to inadequately address the
specific source of systemic risk. Strict
notification, consultation and nonobjec-
tion procedures apply, depending on the
nature and calibration of the respective
measure, and involving authorities such
as the EU Council, the EBA, the ESRB,
the European Parliament and the Euro-
pean Commission. Moreover, Articles
124 and 164 CRR allow macropru-
dential supervisors to set higher risk
weights (up to 150%) in the standard-
ized approach and stricter loss given
default (LGD) parameters in internal
ratings-based (IRB) models for expo-
sures secured by mortgages on immov-
able property.
In addition to the above measures,
the Pillar 2 instruments under Basel III
may be tightened if a credit institution
is found to pose systemic risks. Pillar 2
should ensure that banks prudently
model their capital requirements on the
basis of the risks they face; but no matter
how prudent banks’ models are, they
will not be able to capture the systemic
risk that emanates from banks them-
selves. To address systemic risks via
Pillar 2 measures, a thorough Pillar 2
assessment would have to be conducted
for each bank individually; this causes
“red tape” (high administrative cost
for both banks and supervisors). The
politico-economic checks and balances
required for macroprudential super-
vision are not in place for Pillar 2 mea-
sures, however. Pillar 2 measures are
imposed by banking supervisors for
individual banks.
The communication of macropru-
dential policy to the public is an impor-
tant tool in itself. In fact, most macro-
prudential measures are announced
publicly, while the reasoning behind
Pillar 2 measures and the underlying
Macroprudential Supervision: A Key Lesson from the Financial Crisis
FINANCIAL STABILITY REPORT 27 – JUNE 2014 89
individual bank data are confidential.
Still, the ongoing macroprudential
review (Article 513 CRR) should, in
principle, aim at maintaining the avail-
ability of Pillar 2 measures for reaching
macroprudential objectives. But it should
be ensured that Pillar 2 does not re-
strict the implementation of other
macro prudential instruments (i.e. SRB,
Article 458 CRR).
In addition to the macroprudential
instruments covered by EU law, Mem-
ber States may implement macropru-
dential instruments under national law
(ESRB, 2014a). These include instru-
ments such as defining maximum loan-
to-value (LTV) and loan-to-income
(LTI) ratios as well as imposing lever-
age ratio restrictions. At the current
juncture, however, Austrian law does
not provide for such instruments – a
major shortcoming in Austria’s macro-
prudential framework. A differentiated
macroprudential toolbox would have
the major advantage of making macro-
prudential policy efficient because these
tools are flexible and allow targeted
application.
Notwithstanding all of the above,
macroprudential supervision faces the
following challenges:
• Forward-looking risk identification is
methodologically difficult.
• Some of the data necessary for pro-
spective risk identification are not
available, and some of the available
time series are relatively short. In
Austria, for instance, LTV and LTI
data have not been collected so far;
the collection of these data should be
started as soon as possible.
• Macroprudential measures might
potentially be circumvented via the
shadow banking sector.
Historical experience with previous
instruments targeting systemic risk is
mixed. In Austria, traditional instru-
ments aimed at allocating loans to pro-
ductive investment rather than con-
sumption were quite successful in the
1970s and 1980s.14 Experience in other
countries is more mixed.15 In the early
stages of the present crisis the Spanish
approach, which relied on dynamic
provisioning, was first hailed as a success
story. A few years later, the collapse of
the Spanish banking sector led to a
sovereign debt crisis.16 Given the above-
mentioned challenges and historical
experience, we would advise against
considering macroprudential supervision
a cure-all; it adds important instruments
to responsible financial supervision,
however.
Macroprudential measures are flex-
ible and efficient in the sense that they
are applied only if and as long as neces-
sary, i.e. if a specific systemic risk is
identified. Their calibration aims at
reflecting the degree of systemic risk.
They can be targeted at banks and/or
on- and off-balance sheet positions ex-
posed to the identified systemic risk.
4 The Costs and Benefits of
Macroprudential Regulation
Even if a threat to systemic risk is
identified, a comprehensive impact as-
sessment is required to ensure that the
benefits of any risk-mitigating measure
outweigh its costs. Evaluating the impact
of potential macroprudential measures
is a demanding task, which requires
sophisticated models, reliable data and
expert judgment. It is essential that the
methodology, assumptions and data
used in an impact assessment are made
transparent to allow for evidence-based
14 See Mooslechner et al. (2007).
15 See Elliot et al. (2013), IMF (2013).
16 See White (2013).
Macroprudential Supervision: A Key Lesson from the Financial Crisis
90 OESTERREICHISCHE NATIONALBANK
decision-making (Kopp et al., 2010;
Ittner and Schmitz, 2013).
Assessing Costs
Assessing the cost of macroprudential
measures aims not only at quantifying
the direct cost of these measures for
banks, but also at gauging their macro-
economic impact. The following section
discusses issues that play a role when
assessing the costs of raising the capital
requirements for banks – a key macro-
prudential measure.
First of all, the term “costs” requires
a careful definition. It is crucial to
distinguish between private costs (of
refinancing incurred by banks) and social
costs (the sum of private costs plus exter-
nalities). The redistribution of costs
within society does not constitute addi-
tional social costs. For instance, if the
too-big-to-fail (TBTF) problem is ad-
dressed effectively, banks’ debt financing
costs increase.17 From the point of view of
banks, their private costs go up. But
social costs do not increase because the
government’s contingent liability is
reduced accordingly. They might even
decrease as the welfare loss caused by
the TBTF-related moral hazard prob-
lem is addressed.
Another example draws on the im-
pact of taxation on leverage and private
costs. Higher capital requirements aim
at reducing banks’ leverage. Banks will
have to replace debt by capital (assuming
constant risk-weighted assets). On the
one hand, this raises banks’ private costs,
part of which consist of higher tax pay-
ments as the costs of capital – unlike
the costs of debt – are not tax deductible.
On the other hand, these higher tax
payments constitute budget revenues
and as such do not increase social costs.
Second, an economic impact assess-
ment has to distinguish carefully between
those adjustments in banks’ balance
sheets that are merely a response to
market expectations and those that ac-
tually result from regulatory reform.18
Third, substitution effects in the
financing of the real economy should be
considered. Higher credit cost for cor-
porates and private households may be
a consequence of banks’ increasing fund-
ing cost. However, banks’ rising interest
margins should not be translated directly
into higher long-term interest rates for
the real economy because the real econ-
omy might be able to substitute bank
loans by other sources of finance (e.g.
direct access to debt and equity markets,
internal funding and supplier credit).19
Fourth, second-round effects of
regulatory reform need to be taken into
consideration, e.g. the reaction of
banks’ debt financing costs to lower le-
verage and banks’ behavioral adjust-
ment to regulation are further aspects
which impact macroeconomic cost es-
timates. Both need to be based on care-
ful empirical analysis.
After identifying banks’ private costs
of higher capital requirements, we esti-
17 The TBTF problem arises if bond holders of a TBTF bank expect the government to bail out this bank if it is
insolvent or illiquid. For the bank in question, this implicit government guarantee translates into lower debt
financing costs at any given level of capitalization. As the bank is considered TBTF, the government would be
expected to bail it out in case the bank runs into trouble, which constitutes a contingent liability for the govern-
ment (see the experience of Ireland and Spain during the crisis).
18 Before the current financial crisis, e.g., banks with a core tier 1 (CT1) ratio of 6% were considered well capitalized.
With the beginning of the crisis in late 2008 – i.e. even before Basel III became effective – market expectations of
an adequate CT1 ratio rose to ratios closer to 10%.
19 From a macroprudential perspective, high credit growth associated with interest rates that do not cover credit and
liquidity risk is not an economic policy objective. For a discussion of deleveraging, see Eidenberger, J., S. W.
Schmitz and K. Steiner. 2014. The Priorities of Deleveraging in the Euro Area and Austria and Its Implications
for CESEE, in this issue.
Macroprudential Supervision: A Key Lesson from the Financial Crisis
FINANCIAL STABILITY REPORT 27 – JUNE 2014 91
mate their macroeconomic impact on
the basis of the OeNB’s macroeconomic
model. To avoid misrepresenting rises
in banks’ private cost as rises in social
cost, we incorporate the offsetting
effects discussed above into our macro-
economic model. As a result, the im-
pact of individual macroprudential mea-
sures on macroeconomic variables like
economic growth, employment and
budget revenue can be quantified.
Assessing Benefits
The social cost of macroprudential
measures is then compared to their so-
cial benefits, which are quantified by
estimating the reduced likelihood and
magnitude of financial crises. The po-
tential negative impact on economic
growth caused by the higher cost of
credit can then be set in relation to the
benefits of a more stable financial sys-
tem, more sustainable funding for the
real economy and more sustainable
growth.
Chart 2 illustrates the principles of
an impact assessment by drawing on
the example of a hypothetical activation
of the CCB in 2005. The straight dotted
line depicts the precrisis Austrian GDP
trend projection (based on quarterly
data from 1995 to 2005). The solid line
depicts the actual GDP path. It shows
that as from the beginning of 2005,
economic growth exceeded trend
growth. However, at the end of 2008,
quarterly GDP went down sharply
following the collapse of Lehman
Brothers. Since then, economic growth
in Austria has remained significantly
below its precrisis trend. For illustra-
tive purposes, we engage in a thought
experiment: We assume the CCB had
been available and activated prior to
2005 and released again in December
2008. We further assume that it would
have effectively increased loan margins,
reduced loan growth and economic
growth before the outbreak of the crisis
and improved economic performance
EUR billion
72,000
70,000
68,000
66,000
64,000
62,000
60,000
58,000
56,000
54,000
52,000
Q2 03 Q2 04 Q2 05 Q2 06 Q2 07 Q2 08 Q2 09 Q2 10 Q2 11 Q2 12 Q2 13
Hypothetical CCB Activation in 2005: Stylized Cost-Benefit Analysis for Austria
Chart 2
Source: OeNB.
Note: The precrisis trend from which the projection for Austr ian GDP was derived was calculated using a H odrick-Presc ott filter. The trend estimate
is based on quarterly GDP data for the period from the fir st quarter of 1995 to the first quarter of 2005.
Trend GDP Austria
Additional (unsustainable)
economic growth
GDP Austria Es timated normal business cycle
Output loss caused
by financial crisis
g Macroprudential objective:
loss mitigation
Macroprudential Supervision: A Key Lesson from the Financial Crisis
92 OESTERREICHISCHE NATIONALBANK
afterward.20 The outcome of our as-
sumption is depicted by the dotted
curve in chart 2. We chose an approxi-
mation of a “normal” Austrian business
cycle (i.e. without a banking crisis)21,
because macroprudential supervision
does not aim at eliminating business
cycles. By doing so, we derive the costs
and benefits of macroprudential policy
measures. Their short-term costs com-
prise the loss of unsustainable economic
growth during the precrisis credit
boom (green area in chart 2); their
benefits are that the probability of a
banking crisis and its potential impact
are reduced and that the resilience of
the financial system is increased (red
area in chart 2).
Benefits Outweigh Costs
A comprehensive impact assessment
compares the estimates of the costs and
benefits of proposed measures to quan-
tify their net effect. Kopp et al. (2010)
conclude that the benefits of banking
regulation in Austria outweigh its
costs. In a metastudy on this issue, the
Basel Committee on Banking Super-
vision concludes that, on average, a
1 percentage point increase in the
capital adequacy ratio reduces GDP
growth by 0.04 percentage points
(MAG, 2010). Moreover, it estimates
that (under the assumption of perma-
nent welfare losses induced by crises)
reducing the probability of a crisis by
1 percentage point increases long-term
economic growth by 0.6 percentage
points (BCBS, 2010).
Furthermore, Kopp et al. (2010)
demonstrate that the cost of banking
regulation is lower for banks whose
liquidity situation is more solid and
which are better capitalized, have lower
return-on-equity targets and are more
flexible in adjusting their operative cost
base to changing environments.
5 Conclusions
The introduction of macroprudential
supervision constitutes a key lesson from
the crisis for financial regulation and
supervision. Macroprudential super-
vision offers a new set of instruments
and an elaborate institutional framework
to proactively address systemic risk
within the financial system. The new
instruments specified in the CRD IV
and the CRR constitute the corner-
stones of macroprudential supervision.
Great supervisory powers require
democratic checks and balances. The
respective institutional framework in
Austria aims at balancing the need for
timely action and that for accountabil-
ity, transparency and legitimacy. This
requires a comprehensive communica-
tion strategy that provides for infor-
mation on regular assessments of key
risks and explains the reasons for or
against taking action. The Financial
Market Stability Board (FMSB) should
have a clear internal governance struc-
ture to reduce the risk that blameshifting
may take place among the players
involved on the back of complex deci-
sion-making structures. Moreover, the
dominance of the Ministry of Finance
in macroprudential supervision is at
odds with the respective ESRB and
IMF recommendations and with inter-
national best practice. A more promi-
nent role of the supervisory authority
and central bank should be ensured.
20 At least, these are the objectives of the CCB. Nevertheless, the impact of higher capital requirements on the
weighted average cost of capital is subject to controversy; similarly, their effects on loan margins, loan demand
and economic growth are hard to prove empirically (e.g. SNB, 2014). For the purpose of this illustration, how-
ever, we simply assume these effects.
21 Our approximation is based on the average duration and magnitude of the last three business cycles.
Macroprudential Supervision: A Key Lesson from the Financial Crisis
FINANCIAL STABILITY REPORT 27 – JUNE 2014 93
Pillar 2 of the Basel capital accord is
found to be ill-suited for macropruden-
tial supervision. It is designed to cap-
ture the risks banks are exposed to, but
not the systemic risk that emanates
from banks themselves. To effectively
address systemic risk, a thorough Pillar
2 assessment would have to be con-
ducted for each bank individually; such
assessments cause high administrative
costs for both banks and supervisors. The
politico-economic safeguards required
for macroprudential super vision are not
in place for Pillar 2 measures.
Macroprudential supervision is flex-
ible and efficient in the sense that it
is applied only if, and for as long as,
necessary, i.e. when a systemic risk is
identified. The calibration of macro-
prudential measures aims at reflecting
the degree of systemic risk. They can
target banks and/or on- and off-balance
sheet positions that are exposed to spe-
cific risks. Despite adding substantial
new powers and instruments to the
super visory toolbox, macroprudential
supervision also faces substantial chal-
lenges and should not be considered a
cure-all.
Finally, this paper discusses a num-
ber of challenges related to regulatory
impact assessments that can have a
substantial influence on assessment
results.
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