Form and Function of the ESRB: A Critical Analysis

Abstract

The establishment of the European Systemic Risk Board (ESRB) in 2010 must be seen against the backdrop of the preceding financial crisis. The crisis revealed the financial supervisory authorities’ failure, in the run-up to the crisis, to anticipate adverse macroprudential developments and prevent the accumulation of excessive risks within the financial system. This triggered a heightened awareness among regulatory and supervisory authorities regarding stability at a systemic level and macroprudential developments. The creation of the ESRB resonates with other initiatives in the aftermath of the crisis, among them the establishment of the Financial Stability Board (based with Bank for International Settlements in Basel) and, more recently, the conferral of macroprudential powers to the European Central Bank under the Single Supervisory Mechanism. The ESRB is part of the European System of Financial Supervision, the purpose of which is to ensure supervision of the European Union’s financial system. This article begins with a description of the institutional aspects of the ESRB, building on a study of its founding documents and regulation. Special attention is given to the ESRB’s mission and objectives, which are defined as contributing to the prevention or mitigation of systemic risks to financial stability within the European Union. An in-depth analysis of the concepts of systemic risk and financial stability is conducted, because these concepts are crucial for determining the reach of the ESRB’s authority and responsibility. In view of the magnitude of the tasks assigned to the ESRB, this chapter considers whether the ESRB in its existing form is well suited for the large and complex undertaking it is expected to perform. This question is addressed with a critical analysis of the ESRB’s applicable measures as well as its governance structure and decision-making processes. There is reason to believe that organisational improvements will be necessary to obtain the envisaged effectiveness. The chapter concludes with some remarks about the legitimacy and accountability of the ESRB.