The Unassuming Economist

From European Systemic Risk Board:

“In this report, the ESRB presents its medium-term assessment of vulnerabilities relating to the RRE sector across the EEA countries. In carrying out this assessment, the ESRB first performed an analysis of vulnerabilities across the EEA countries. For the 24 countries for which the vulnerabilities identified were more pronounced, an in-depth analysis was conducted. This analysis pointed also to the need to take into account or change other than macroprudential policies, for example by changing tax incentives or increasing the housing supply. A similar assessment was conducted by the ESRB in 2019, when 11 countries received either ESRB recommendations (Belgium, Denmark, Finland, Luxembourg, Netherlands and Sweden) or warnings (Czech Republic, Germany, France, Iceland and Norway).

The risk assessment concluded that, in five countries which received ESRB recommendations or warnings in 2019 (Denmark, Luxembourg, Netherlands, Norway and Sweden) the vulnerabilities relating to residential real estate markets remained high, while in six countries (Belgium, Czech Republic, Germany, Finland, France and Iceland) the vulnerabilities were assessed as medium. Among other EEA countries, 13 (Austria, Bulgaria, Estonia, Croatia, Hungary, Ireland, Liechtenstein, Lithuania, Malta, Poland, Portugal, Slovenia and Slovakia) were identified as facing medium risks.

The policy assessment found that in five countries which received ESRB recommendations or warnings in 2019 (Belgium, Czech Republic, France, Iceland and Norway), policies were assessed as appropriate and sufficient to mitigate the vulnerabilities identified. In two countries (the Netherlands and Sweden), policies were assessed as being appropriate but partially sufficient, while in four of the countries (Germany, Denmark, Finland and Luxembourg), policies were assessed as partially appropriate and partially sufficient. Among the rest of the EEA countries analysed in this report, in one country (Slovakia) policies were identified as appropriate and partially sufficient, while in five countries (Austria, Bulgaria, Hungary, Croatia and Liechtenstein) policies were found to be partially appropriate and partially sufficient.

In countries in which the policies were assessed as only partially sufficient to mitigate the identified vulnerabilities, the ESRB suggested various macroprudential measures to be considered by the national authorities. In particular, the ESRB pointed out that a number of countries should either introduce additional borrower-based measures or tighten existing ones to mitigate the existing vulnerabilities more effectively or prevent a further build-up of vulnerabilities. Countries with accumulated vulnerabilities should also ensure that capital is preserved until a possible materialisation of risks or consider (re)introducing capital-based measures once the economic recovery is on a firm footing. However, taking into account the economic uncertainty related to the pandemic, any policy actions should be carefully assessed to ensure that they contribute towards mitigating RRE vulnerabilities, while aiming to avoid procyclical effects on the real economy and the financial system. In the near term, it is particularly important for all countries that banks make adequate provision for expected losses. Finally, the analysis notes that, in some countries in which the systemic risk levels identified remain high, interventions in other policy areas may be required to complement macroprudential policy.”