 So welcome to this panel of the ESRB conference on the macro-prudential policy beyond banking. And indeed, this is a very important topic to which both the ECB and the SRB have dedicated a lot of attention over the years because we know that it also contributes to the problems of excessive leverage and liquidity tensions that are behind the crisis. And the importance of the non-bank segment of the financial sector has increased enormously. Just to remind you of some figures, the total of money market funds plus investment funds in 2008 in the Euro area represented only 17% of total assets of the banks. And now it's 40% because total assets of the banking sector have declined by 18% and the aggregate assets of the funds industry has more than double than 2008. And so this creates its own potential risks of leverage and liquidity spirals. We see that the segment of investment funds has been increasing the average maturity of each assets, which means an increase in potential liquidity risks. We also see that there is a lot of prosyclicality in what regards margins and air cuts that affect precisely the possibility of building up leverage and creation of inside liquidity both via derivatives or via in the repo market. So it's, I think, totally justified that we have a reflection on what to do in terms of macro potential policies regarding this sector. We should do and can do stress tests, of course. And by the way, it's one of the recommendations coming from the FSB in the recent recommendations about asset managers. And we have participated recently in a pilot that was coordinated by the Bank of England, precisely trying to see what pressures could come at the same time in the sphere of asset managers. Then there are also other recommendations in the FSB document, which have to do with the possibility in extreme situations of intervention of authorities, regulators in the liquidity management of the sector. And also an improvement in reporting, including reporting to allow us to calculate synthetic leverage of investment funds. Because we know that there is a big difference between the leverage that we can see straight in the balance sheet and what is build up with derivatives in particular. So synthetic leverage sometimes is quite high. And now if the reporting is indeed complied with, we will have the possibility of knowing what is going on. And then, of course, there is the whole question of the regulation of margins and air cuts. Because what has been done is very narrow. As a result of the FSB recommendations, what was done was just for centrally cleared SFTs and excluding also sovereign debt from debt. So the field of application of the recommendations of the FSB on margins and air cuts is indeed very, very narrow. So there is a whole discussion. And we have been active. The SRB published a report in the spring about precisely macroprudential tools for regarding margins and air cuts. All these are the subjects that we all expect that the excellent members of this panel will address and help us to reflect on all these. And indeed we have representatives of the public and the private sector, which is good to have a full discussion. So starting from my left, we have Gabriel Bernadino, who is the chair of EOPA. Then we have Lex Odguin from the LCH group. Stephen Mayor, who is the chair of ESMA. Mario Navarro from the European Commission in charge of these stability issues. And finally, Joven Stennis from Schroeders. So I will follow the order that is presented in the program. And I then give the floor to Bernadino, please. Well, thank you very much, Victor. And it's a pleasure to be in here. And of course, to be able to talk with you a little bit about insurance and what we're doing on the macroprudential side. This is, of course, very relevant area. And as we all know, insurers play quite an important role in the market. I don't know if I've got the pointers. Yes, thank you. Just to be easier. Insurers play, of course, a very important role in achieving stability in the financial system and overall in the economy from all the angles, be it as asset investors, which are, of course, huge asset investors. European insurance industry has around 11 trillion of assets, 11 trillion euros of assets. And so this is, of course, very much relevant, but also from the liability side and the interactions that they've got with the economy. As we all know, we had in 2016 the implementation of Solvency to the new risk-based regime. And this was indeed a major step to mitigate the likelihood and the impact of failures in the insurance sector. We have, of course, a process ongoing right now of implementation, looking at convergence and consistency of this implementation. But, of course, this was a fundamental step in this process of looking to insurance, both from a consumer perspective and from a financial stability. But, of course, as a risk-based regime, Solvency to is not a zero failure regime. So we need, of course, to deal and to have tools to deal with situations where there could be failures. And also, of course, Solvency to, it's a micro supervisor regime, so it's focused on the entities and on their probability of failure. At the same time, of course, already Solvency to has some elements which we can see from a more macro perspective. There are some elements that are looking in terms of avoiding excessive prosyclicality, et cetera. Now, what we are looking right now is to see also how this links to the possible externalities that the insurance sector can produce and can have for the overall financial system and this element of analysis of systemic risk. For us, there are two fundamental elements that need to be developed for the 2021 review of Solvency to complete the potential framework on the insurance sector. One, it's a macro-prudential framework including the way to look at systemic risk from a specific insurance sector. And the second one, a recovering resolution framework including the role of insurance guarantee schemes. And so these are the two elements that are really now strong on our agenda and I will tell you a little bit about how at AOPA we are looking at this. Firstly, on the macro-prudential framework. So the first thing that we wanted to do was to define very clearly what were the objectives that we were targeting. As you know, in terms of defining a macro-prudential framework, it's fundamental to understand the objectives that you've got. So the first thing was to look at what are the operational objectives that we want. And we defined a couple of them and must emphasize a number of these operational objectives. Firstly, to ensure that there is sufficient loss of sovereign capacity and reserving. You know that in insurance, contrary to banking, for example, reserving is a fundamental element because, of course, in insurance you've got the inverted cycle. So you receive premiums to pay claims afterwards. So to have sound provisioning and sound reserving it's fundamental. So this is definitely an operational objective. Then looking at the situations, of course, where we are with the search for yield because, of course, of the low yield environment, we believe that definitely discouraging risky behavior, it's also another important operational objective limiting prosyclicality and discouraging excessive concentrations. So we believe that these operational objectives are fundamental if we want them to define a macro potential framework for insurance. Intermediate objective, of course, will be to mitigate both the likelihood and the impact of the systemic crisis with the ultimate objective, of course, of preserving financial stability and having insurers contributing to this stability. Now, the way we're looking at two systemic risks, and I put in here this graph just to give a little bit of the idea. There's been a lot of work in these last years about systemic risk and insurance. And I must confess that we were feeling the absence of a conceptual framework to think on this. The first initiatives, I think it were much prone, of course, from an idea which was conceptually linked to what was the thought process in the systemic risk in the banking side. So we had to differentiate and to see how can we look at systemic risk in insurance. And this is basically the kind of conceptual basis that we are working right now. On the one side, what is important to start is to understand what are the activities from the insurance side and how these activities, of course, drive the risk profile of companies. Then, of course, by having different types of activities, you will have different risk profiles. And then you will have, you need to look at it from an entity-based perspective, an entity-based source, but from an activity-based source, and also from a behavior-based. And that's what we're looking at right now. So the activities, they derive the risk profiles. The risk profiles, of course, will have systemic risk drivers. These systemic risk drivers, of course, will have then transmission channels that can then, of course, have an impact on the financial system. And depending on when you look at from an individual perspective, entity-based, or if you look at from an activity-based or a behavior-based, you will have, of course, different systemic risk drivers and different transmission channels. We are definitely following this conceptual approach, but very importantly, we're trying to link it to what we already have from a micro-perspective. Because as I said, there are a number of elements already in Solvency 2, which are quite relevant from a macro-pronential perspective. So we want to define an approach to systemic risk and to macro-pronential policy and insurance that is consistent with the micro-supervisory regime. And risks and risk drivers that we identify and then the consequent transmission channels that are dealt with already sufficiently in an entity-based approach in a micro-regime, they should not be duplicated from a macro-perspective. And at the same time, we need to ensure that the risk measurement that we do from a macro-perspective is consistent with the risk measurement from the micro-one, otherwise you will have different incentives for the companies and for the managers and they will have, of course, much more difficulties from a supervisory perspective. So this is work going on right now on identifying what we have already, what we need, if there are tools that we still need. But this element of looking it from an activity-based, I think it's a huge different approach than from the banking side where you have, of course, only the focus on the entity-based and on the designating entities. Finally, on recovered resolution, we have issued in July an opinion from our side on this towards the European institutions. Of course, you know, if you have a good micro-regime and a good macro-regime, this should limit, of course, the casualties. But if all of these go wrong, then we need to have a process to have an orderly resolution of insurers. And so that's what we advocate in this opinion towards the European institutions. For us, it's fundamental to have a recovered resolution regime in Europe because it's quite fragmented right now between the different member states. The tools are completely different from different supervisors around Europe. So we need to have a minimum framework to have a recovering resolution of insurers in a sound way. Tremendously important from financial stability perspective because, of course, we have a lot of cross-border groups, but it's also tremendously relevant from a consumer perspective because if we want to have more cross-border business in Europe, we need to make sure that at the end, consumers will have, you know, a fair treatment throughout Europe when things go wrong. So basically the key building blocks of this, the scope we believe that it should be applied to all Solvency II companies. Of course, we do proportionality in there. Preparation and planning, of course, pre-emptive recovering resolution planning. Actually, pre-emptive recovery planning, it's a natural extension of what we already have with Solvency II with the own risk and solvency assessment where companies need to look on a forward-looking perspective to their needs. So this will be a natural extension of that. Then very importantly, of course, early intervention that, you know, should work before you breach the capital and you still have equity in there to deal with. And insurance things are, of course, different from the banking side. We were not advocating to have one sole trigger. We believe that, of course, there are a number of criteria that we need to have in order to define what is the point of non-viability. But again, linking it to the Solvency regime that we have in place in order to have this working in a consistent manner. Finally, of course, resolution, including the objectives of resolution, the tools that we have in there. We touched upon, in our opinion, on, of course, on the thorny issues of write-downs, both of creditors, but also as a last resort measure for liabilities, policy-holder liabilities. Bailin is something that, you know, in some cases in insurance it's already embedded in the contracts in there. But of course, as a last resort measure, if people go, you know, worse in insolvency that if they will have a resolution which is done in a proper way, we believe that there should be, this power should be also in there. And, of course, lastly, cross-border cooperation, crisis management groups, all of that, that is, of course, I think already an international standard in this area. Just two final things, follow-up work. We are looking now at resolution funding, so as part of this mechanism of recovering resolution and the role of insurance guarantee schemes. And I think that this is fundamental. Again, in an internal market to have cross-border business, you need to have these tools there in order to have a completeness of the framework of insurance. That's what we want to achieve towards the 2021 review of Solvency II. Thank you very much, Gabriel, for this overview of the problems from a macro-prudential angle of insurance. Now, Lex, you have the floor. And pleasure to see you back here. Pleasure to be here. Thank you, Peter, and thank you for the invitation indeed. What I will do is first make a few general remarks on the further development of macro-prudential policy and then focus on CCPs in particular. Macro-prudential, in my view, aims to focus on the financial system as a whole. Therefore, by definition, I would say all other financial institutions than banks should be in scope. The fact that it is not yet the case shows that macro-prudential policy, although it has made quite some progress already, is still in its early stages of its life. And that indeed justifies to look into other institutions than banks and the topic of this panel. But perhaps even more important is the further development of a conceptual theoretical framework that allows us to describe and analyze comprehensively not only all types of financial institutions, but also all the interconnections and the patterns emerging from those interconnections. The financial system is a complex network, is a complex system. That means that using a framework, you should use a framework that allows you to cope with complexity and also with related uncertainty rather than measurable risk. Doing that and going somewhat more in this direction would imply a shift in emphasis from assessing systemic risk to coping with what I would call systemic uncertainty. It would imply a shift in emphasis from financial stability in a more narrow sense as objective to resilience of the financial system as an objective. It would imply a shift in emphasis on stressing the importance of diversity rather than diversification. It would imply that developing the right conditions for resilience is more the emphasis of policy, should be more the objective rather than targeting precise outcomes for systemic risk. Interconnectedness, I think that's where it's all about in the end in macro policies, also refers to the policies themselves. I think we should be aware of. Not only of macro prudential policies, with the different prudential policies and conduct of business policies, but also with monetary policies and government debt management policies. For us, the CCPs, the past few years, the latter policies, monetary policy and government policies have at several moments had strong impacts and it goes too far to elaborate too much, but let me give three quick examples, let me mention them. The introduction of the leverage ratio and the repo market led to increased investment risk, reduced our investment capacity. Unconventional, second example, unconventional monetary policies and the volatility of interest rates, the impact of unconventional monetary policies on the volatility of interest rates on the repo market and had an impact on the pro-cyclicality risk of our own policies. Thirdly, an issue that I would love to go into deeper, but there's no time to do that, but if I look at our pro-cyclicality risk and the impact on our pro-cyclicality risk, we have measures for that. I'll come back to that a little bit later on. Without any exception, the few breaks that we have had in our pro-cyclicality policies over the past few years all come from central bank actions of government actions. So that's, I think, something that's worth to reflect on. Interconnectedness of policies raises questions about the institutional architecture of supervisory policies in the somewhat longer term, I would say, and also about policy coordination. Again, not something for me to elaborate upon, but I think it is worth mentioning. Let me now return to some specific CCP issues. First of all, of course, macro-prudential considerations are not new to CCPs, I would say, on the contrary. After the crisis, CCPs have been given a role, a very important role, I think, as important responsibility as guardians of systemic stability and systemic resilience. I see them and I see ourselves as, on the one hand, private companies, but with a strong public mission. The waterfalls, and certainly our waterfall, has been developed with this systemic role in mind and upfront, as it were. Looking then at macro-prudential tools in the context of CCP, I think, first of all, as a general principle, I think macro-prudential tools should, to the maximum extent possible, be embedded in the waterfall of the CCP and in the rule books of the CCPs, rather than be based on what I would call ad hoc interventions. They should, to say the same in other words, they should be predefined. Their use should be predictable and be transparent to the extent possible and wise. I must say, if I look at the current situation, I would say from a macro-prudential policy point of view, CCPs look pretty good at the moment. At LCH, we have to deal with quite a large number of prudential frameworks that we have to operate in, and it's not just because I'm here today, but it's really true that Amir, in particular, is a very good framework also from a macro-prudential point of view. I'd like to touch upon four or four issues for further development and or discussion in the context of the macro-prudential framework for CCPs. First of all, central bank accounts. I think as a fixed policy requirement, also from a financial stability perspective, CCP should be able to deposit their liquidity at central banks. The financial stability aspect of that is that in managing financial stability, CCPs try to be ahead of the curve and ahead of the game. So if you see problems building up in the financial system, what you will try to do is to become more liquid than you would otherwise be, and to do that gradually before the stress is already at high levels, and the best place to build up your liquidity is at the central bank. So shift collateral-based margin to cash-based margin gradually and early on. So that's the first point central bank accounts. Secondly, further developing what I would call really macro-stress test. I think encouraging developments are taking place there, but that should continue. And I think it would be good to combine that with and also in the context of transparency to also think about establishing individual CCP standardized stress tests. That was my second point. Third point, finalizing the recovery and resolution regimes for CCP. Again, data work is quite advanced, certainly also in Europe to make a long story short. There is of course always something to complain with buy-and-large. I must say, and I will not do that because I think buy-and-large, the ECB proposal, the EC proposal, sorry, is a... Already foreshadowing new responsibilities. I see. Buy-and-large, the EC proposal is a good framework. Finally, further developing the anti-prosecurity element in CCP behavior. I like personally very much the way we at LCH have done that over the past few years. We look at pro-security along all the aspects of our CCP framework. Let me give one example, perhaps the most important aspect. All margin models that we used are calibrated from that perspective, from protecting against excess pro-security. In short, it means that no margin increases of more than 25% during the holding period can occur if the past 10 years are played forward. So we calibrate the models in such a way that if you use the data of the past few years, play them forward, that the model may never generate an increase of more than 25% in your margins during the holding period, which may be different from asset class to asset class. Effectively and somewhat simplified, because this may sound rather technical, but effectively and somewhat simplified, it means that you reduce margins more slowly than would be the case without such a policy and without such a calibration in cases of falling volatility. And I think building on that type of framework and which is related to what I said earlier, it is embedded in CCP behavior, I think is a fruitful way forward. Thank you very much. Thank you, Lex, for your important points of course naturally directed to the question of the resilience of CCP's, which have become in themselves much more systemic than they were before with the push by the regulatory reforms to have more centrally cleared transactions. That's very important. Although the questions related either with derivatives or say repos go beyond just the question of the resilience of the CCP's and have to do indeed with the role that they have had before the crisis in creating leverage and inside liquidity in the system. So what we have recommended, particularly in last year in the specific conference organized by the ESIB on margins and air cuts was indeed that there should be the possibility of interventions on margins and air cuts but at the same time for centrally cleared and non-centrally cleared transactions at the level of transactions in order to capture also the non-banks because many transactions goes through banks and if banks by being regulated are exempted then the whole purpose is self-defeating. So we see the need of a more comprehensive approach to the question of margins and air cuts because we know that if they are totally defined by the private sector in individual transactions they tend to be hugely prosyclical. I understand that CCP's being aware of their systemic role may be more careful in looking also to this prosyclicality thing but that's not the case of other investors that are responsible for the transactions. We know indeed before the crisis this prosyclicality was so huge that for all types of paper securities financing transactions had very very small air cuts and then all of a sudden when the crisis came they were huge and created then the fire sales and all the rest when the chain of inside liquidity collapsed at the same time. So just an aside that has not related with what you said from the perspective of CCP's alone. Now Stephen, margins and air cuts it's a little bit with you and many other things nowadays are coming to your table in all sorts of projects and progress that the commission in particular has proposed recently with our full support. So Stephen. Thank you very much Vitor and indeed the ECB and also Vitor personally has been very supportive of expanded powers for ESMA. Thank you very much for that support and Vitor has always expressed also very clear interest in capital markets and also stability issues in capital markets. When President Draghi yesterday opened the conference he did it in the context of the 10-year anniversary or to what extent should you call it an anniversary of the financial crisis or the regulatory reform after the financial crisis. And although we tend I think to see the financial crisis as being very bank-oriented it is true and it's clear and also from the debates these days that also capital markets play a very important role in terms of risks in the financial system. So very good indeed that we talk here in this panel about stability risks in the non-banking sector and to some extent that is very unusual. We are getting used to it now as a result of the financial crisis but before the financial crisis basically financial market regulators, securities regulators had very limited interest in stability issues and I think one of the very clear results of the regulatory reform has been clearly giving mandates to securities regulators to think about stability. So I think that is a clear step forward and we should have and that better balance between on the one hand conduct risks and on the other hand stability risks I think is the right way forward. First of all because as also explained by FITOR the non-banking sector is growing. We can see the asset management sector has doubled in size in the past 10 years. There was the reference to CCPs because of the central clearing. Clearly they are becoming bigger and that development will continue but I think there is also the policy intention behind this is to make capital markets a more important part of the financial system. Personally also because I believe is that it will make the whole financial system more stable, a very dominant focus on banks in a financial system. I think you can make the argument is that it will be more prone to instability. The reality is if you look at ESMA in the past 10 years most of our regulatory reform we have been involved in have been more related to potential stability issues than conduct of business issues and to some extent there has been even the risk of an unbalance where is there sufficient attention to consumer protection, investor protection type of issues. One final comment on the mandate issue is that it is good that there is more attention for stability issues in securities markets but if you go around the world you'll still see that it's not formalized in terms of what are the mandates of securities regulators and so a lot of the times the stability mandate is at the central bank and there's still the risk then that there's not sufficient attention for capital market issues. In the EU at ESMA we have an explicit mandate for stability and I think that is also as we also have an explicit mandate for investor protection and consumer protection which I think is the right model. I think for the remainder of my contribution I would like to comment quickly on three areas. First, more generally what kind of areas have been affected by stability thinking and stability rulemaking then shortly on how should we think about tools, stability tools in securities markets, financial markets and finally a few brief remarks on the institutional frameworks. I think the general areas in securities markets that have come under let's say rulemaking, policymaking subject to stability concerns with stability tools they've been mentioned here these days but just to quickly go over them the most clear one, the clearest one is OTC derivatives where we have moved to much more transparency and also much more resilience of counterparties making sure that they have the right margins that the right risk techniques risk policy, risk management a clear way forward there. Asset management also clear steps forward both globally and in the EU with the AFMD, the whole hedge fund sector and also the private equity sector has come under supervision and especially for those areas there are also specific stability type of measures like the introduction of a leverage limit which is quite a innovation also if you're looking at the worldwide level in that sense also the EU is I think in the front group in terms of thinking about stability issues in capital markets. Also credit rating agencies in the area not frequently mentioned but for example reducing the hard wiring of ratings in contracts in rules and regulations is very stability oriented and the other area that I should mention two other areas of course securities and financing transactions where we know that these securities landing and repo transactions increase the interconnectedness in the system and we're on the way in the EU to bring more transparency there but also bring requirements regarding the reuse of collateral. Probably final element that I should mention and maybe not frequently mentioned is explicitly contributing to stability but if you're looking at securities markets regulating there has been a general trend of going on exchange moving away from bilateral transactions and moving on exchange and that in general will increase the transparency over securities markets and I think it also contributes to stability. Then maybe two, how do we need to think about the tools and in banking there are very relatively clear tools how to respond in towards stability risks. A few remarks on those tools in securities markets. First of all to stating the obvious first of all securities markets is a very diverse system of business models. We talk about it as a homogeneous area but it's not. This is about financing companies this is about trading venues this is about CCPs and each of the sub sectors of the capital markets has its own business model and you need to think about specific tools that would be appropriate for those business models and also to state the obvious these models are very different from banking models and so asset under management is not a banks balance sheet and a run on a fund is very different from a run on a bank and I think we need to take this very well into account when we devise our tools. Making these tools should be a joint effort both from stability experts but also experts in securities markets and also I would argue is that we should try to use as much as possible already the micro tools that we have and just to mention a number we already have the leverage ratio now in the asset management industry and I think we can use that to respond to stability risks in the asset management industry. Stress testing is a very important area for securities markets. We have now gone through our second round of stress testing for CCPs which is very different from stress testing for banks. We have done it in cooperation very good cooperation with the EASERB we're now in the second round and we need to continue that and improve also the methods we're applying there. We're also in our first round of thinking about stress testing in asset management and there are all kind of very fundamental things. Should this be top down or should this be about standardizing the individual stress test conducted by the funds themselves. So at this stage I think with the proposals on the table that are now I think we already have the measures as we are in the current pieces of legislation or as proposed I think we have a very good set of tools although in some cases you don't want to rule out that you need for example the liquidity management tools in the case of investment funds we know that there is this whole wide range of redemption holds, there are redemption fees there side pockets but if you look at it across member states in the EU it appears that it varies from member state to member state what is available. Finally one measure and tool that I should mention that will start in January 2018 is that we will have the banning powers under MIFIR and explicitly it refers to stability risks as an important reason to ban certain activities which I is also I think innovative and a tool that we need to use when appropriate and when required. Finally a few remarks on the institutional framework the only thing I want to say here is that we have many differences who is responsible for what and so if you are looking now at the leverage ratio under the AFMD for hedge funds it is in principle a leverage ratio that will need to be set at a national level or currently under the AFMD a power at national level and the role of ESMA is there to give an opinion so to some extent it is similar to the role of the EASER B that also has these powers on recommendations but no further powers. Under MIFIR we will have banning powers where it is not about an opinion but where it is an actual intervention and we can instruct that that is the power that needs to apply across the EU I think it is too early to say at this time what is the best model we need to clearly look into that we need to get used to using these tools and then evaluate indeed what is the right level to have these stability tools. Thank you very much for your attention. Thank you Stephen for your relevant points you would only make a remark on the leverage ratio limits that as you highlighted exist but as far as I know they do not yet include the concept of synthetic leverage so they are simpler and in that sense because indeed it is not easy even for regulators to calculate the synthetic leverage ratio because all the information about the derivatives that are held by the entities is totally reported but I hope that with the recommendation coming from the FSB this indeed will progress to a more complete consideration of this issue because the methods that exist allow a lot of netting and we saw in the crisis that it is also worthwhile to look to the gross concept of leverage because the edging that is supposed to be there and work perfectly on paper when the crisis comes we see that the edging is not perfect indeed and that netting does not work so much in practice absolutely as I challenged you I will give you the time to respond because you triggered also and I think that I should have mentioned in my opening remarks is of course the whole data collection which has expanded massively as a result of the financial crisis and we are precisely now in a process where we are collecting the data on the funds and also coming up with a common measure on leverage one of these things because we have no stability background or tradition in this area is no common definition of leverage and so one part is on the one hand making sure that we have the right quality data but at the same time also developing a common measure of leverage in our view we have now the right both powers regarding data and the measurement of leverage very good very encouraging so now I will give you another from the commission the lead is later in these matters please you have the floor thank you very much chair and thank you very much for inviting not only the VP twice in a row but also me twice in a row the second year and that's very kind of you it's not you and it's very kind so thank you what I want to do with you today is to ever look at the way you put together shadow banking and the CMU initiatives and propose some reflections on the way forward as we are in a ECRB conference I will even there to end by making few suggestions to the ESRB on what the SRB could look in this area now all the panelists before me and also the chair before me have made very clear that of course the growth of the shadow banking of the last few years has not gone unnoticed and not only that but obviously it's even set to grow much more in the future it's revealing actually that with the growth there has been a progressive change in the way we call it we used to call it shadow banking because shadow meant some sort of absent or lighter regulation that may not be anymore accurate I think Steve has argued somehow in that direction and I will even dwell a bit more if possible in that same direction so actually from a just from a simple stylistic point of view we have noticed institution moving from shadow banking to market-based financing or non-bank financial intermediation in my remarks I will be extremely loose and I will think I will use both terms more or less interchangeably I'll do that also because let's say on the one hand moving towards CMU which is a flagship initiatives of the European Commission that is just what we expect so we should expect greater market-based finance on the other hand of course in so doing and we have all sorts of quotes and views from eminent policymakers in so doing there may be a number of risks that emerge and for which we haven't yet thought about so if you bear with me I think I'll propose you to go through four points point number one is understanding what are the drivers behind the growth of the market-based financing point number two is looking at the existing provision that we have what Steve just did and maybe deepen a bit that number three is look at what we at the commission could do going forward and as I said number four is humbly give couple of suggestions to the SRB and then would be for Francesco and Thomas and all the others to decide whether they are good enough or not now the importance of understanding the drivers behind the growth of shadow banking I mean you could have some simple explanations it could be a valuation effect it could be a growing investor's demand and collateral demand from financial institution for safe and liquid assets it could be some enabling and regulatory provisions that the market already finds or has anticipated like the simple and transparent securitization regulation that is just now in the market so you could have a number simple and relatively knock was explanation it could also be for less in knock was explanation it could be some regulatory arbitrage even some tax arbitrage after all one of the lesson of the crisis was exactly that was through the different loopholes of the arbitrage that most of the crisis past a simple reply to that which is squarely in the area of macro policy a simple reply to that is to have a comprehensive consistent regulatory and supervisory approach on what operators do let me take an example mortgages for example mortgage provision there are countries Netherlands the country of my friend Steven where about 75% is done by banks and Lex as well sorry 75% is done by banks and 25% by non-banks where there we have a macro instrument which LTV for example which could which could be of use in order to in order to avoid in order to avoid that through the channel you miss the overall the overall picture so the reason for growing are maybe maybe different a clear let's say a clear correlation between the growth of the market based financing and the growth of the risk has not been established so there is there is probably some work to be done there now what the current legislation does the current legislation as you know first there is an institutional dimension which is what the VP presented yesterday the ASAS on one side the SRB on the other side we have proposed important reforms of both of them so I think on that side were quite covered as for the activities leverage risk you just witnessed a very interesting debate between Vitor and Steven on to the extent that the leverage risk is covered I would say what I would have put forward without having heard that debate was that the leverage risk is addressed to some extent which I think is exactly what was said here so clearly in the overall area both monetary funds assets and IFMD the leverage ratio is addressed one may want to go forward take another risk the liquidity risk liquidity risk you have it addressed equally in assets in IFMD and the MMF regulation take the interconnectedness risk that's I think Lex made the point which is addressed into the EMIR regulation and I think clearly that is an area for example where the SRB could maybe do some more work on the relationship of the interconnectedness then if that is the case so if the case is that both institutional and from a legislative point of view we have the tools and the matter is about perfecting the tools both on the institutional level with the reform proposed and at the legal level with the various points that you have raised and that I have raised well then I think it's pretty natural that the way forward for the commission must be divided in in two phases phase one in the short term I think what we should do is obviously monitor deeper monitor deeply the systemic risk and to see whether we can establish a clear correlation between size of the growth or risk beyond a certain size or anything of that when you say monitoring you say data that's I think was a point that was very clear made by Steven in response to Vitor and if you say data then I'm happy to point out that in our ESA reform the issue of data is very prominent and we give lots of power to Steve and colleagues to go and collect data in order to in order to be able to know what they are talking about that's probably is what we need to do in the short term in the medium term what we have probably to do more is to look at whether we can work on the tools so I'm not promising anything but I think that we should have a view on whether additional additional tools or new regulatory or new regulatory provisions could have an impact to eventually to eventually deal with one or the other subject or risk that has not been addressed clearly I believe it's very important but this was said by everybody it's very important that this is done not in isolation but it's done in an internationally coordinated approach for data there to say between the work that is done with the FSB and other international entities there is no particular risk so if that is the logic of what the commission could do where could the ESRB help in doing that I think the first point where it could help is that slide for example what I've been talking about is very little it's just if you look at what systemic risk there are a number of things that affect systemic risk I've been talking probably about the first three or four indent under financial policies there is much more the ESRB with its unique with its unique pooling of competencies from all over Europe could obviously look also at the other area and help and then there are some areas where growing maybe faster than we thought and also could be work some analysis one is obviously the ETF the passive the passive funds fine when they are small when they become big and the passive become larger what does it mean that is an area that needs to be explored the largest asset manager for example is another one in concluding what I would say is that the growth of the market based financing was in the cards as happened more or less as we were expecting I would dare to say that the existing institution and regulatory framework and the various modifications that we were able to do over time has helped to a company to a company that growth and what remains to be done is clearly a closer monitoring and eventually and only if obvious risk arise and eventually think of other tools many thanks thank you Mario very much and finally I give the floor to you please Vittor thank you very much indeed for inviting me today thank you very much indeed as Steven said a huge amount of progress has been made and we certainly welcome Mario's new proposals last week on expanding the powers of users but this panel is really next for macroprudential policy and I thought it would be useful to contribute for remarks quickly first, strength through diversity should really be the motto of our European financial landscape that we're creating growing market based finance should be welcomed as a source of strength rather than weakness and I share Steven's enthusiasm for a much more balanced ecosystem but I think macroprudential tools and approaches need to be much more focused on proportionality rather than on cross-sectional consistency which was in the rubric of this panel and I'll give you the example of how to approach the fallacy in approaching bank stress test to the mutual fund industry I think second, I think macroprudential policy in the ESRB can add enormous value making recommendations where they see gaps or weak links due to silo based regulation and should champion a much more holistic based view of the system and I want to use the example of a gap I see around the funding of Europeans small and midcaps which obviously generate 80% of the jobs in Europe where I think there are weaknesses at this moment I think thirdly I've personally been surprised as a market practitioner how little cyber risk has come up in the last two days I've really been amazed for me this is the single biggest risk in the non-bank financial system that we need to think about and I want to just add a few comments on that and I'm sure Lex will talk about that as well and fourth is really macroprudential policy how can it play a useful role in assessing emerging risks and I'm going to use bitcoin as a provocative example but more not that I'm worried about it today so I think a diverse ecosystem is a real source of strength knowing that I was going to be sitting next to Mario I looked up the EU's motto is united in diversity or diversity in each language and whilst this normally interpreted in different cultures and customs and nation states I think it's as relevant financial services as it is elsewhere and I think we need to really think about what we've learned and I apologize if I go to my first slide please if you could click forward one slide I want to just think about what we've learned through the banking crisis the banking crisis taught us we needed a much more diversified funding system for corporates, thank you, and infrastructure because top heavy banks which were too levered and such maturity mismatch were at the heart of the crisis in the last eight years pretty much all of the growth of net lending in the eurozone has been financed through the bond markets about half a trillion has been shrunk from bank lending which is the yellow in my left hand chart about half a trillion has been financed for corporates from the markets in other words the proportion of funding coming from markets has grown from about 17% to 29% and I apologize I chose ECB statistics rather than EU as a whole but it just shows you how powerful a mechanism this has been and obviously the central banks quantitative easing and other programs have reinforced this it's been a safety valve and therefore I think we should take pride in what we've achieved but really then think about what do we need to do next I recognize mutual fund holdings of corporate bonds have doubled in both Europe and the states and therefore it is appropriate for us to challenge and ask the question how big a risk they are but I think sometimes we jump to conclusions in the last 150 years there have been numerous banking crises if you look at the IMF stats there's over 200 in the last 150 years that's simply not true that we do not have good examples of runs on bond funds the US money market fund which was short dated paper is exceptional for long dated bonds there is simply not a good example in history and in fact corporate bond funds have never been flighty even in 1994 where we got a big reversal of markets only 5% of bond funds got redeemed in the worst 3 months and that compares to between 5% to 10% of liquid buffers that most bond funds are running today and I can run you through each and every major crisis in emerging markets in the west as a system that bond funds have not had runs individual funds may have had but it's not systemic one reason is that many people invest in daily funds and use its funds for a gold standard they're on the whole saving for retirement and particularly if they're an attack sheltered vehicle they don't move them and what's more corporate bond funds are really only a part of the puzzle talking about data the Fed revised this data last year and showed that only 17% of corporate bonds are actually held by mutual funds it's 15% of the UK I couldn't get the eurozone number unfortunately because I just don't it's not available but it's certainly probably so it's not a big proportion I think one other interesting development is that now the more and more investors who are asset allocating and moving money in and out are using ETFs instead of mutual funds so bizarrely enough ETFs have made mutual funds less volatile rather than more and that's something we need to think about that doesn't mean they shouldn't be strict regulatory focus I think I've argued in the press and on other panels that there should be stress tests for funds but are they at fund level not at a company level and I think the wonderful work that Stephen and his team have done IOSCO and AIFMD are good standards which we can use so if bond funds aren't the risk what should be I think we as a community should look at where have we got new nodes, Maria mentioned ETFs Lex obviously mentioned clearing houses that's not to say there is a problem but these nodes are probably areas that are ripe for extra work second point and as a market protectioner I think we should consider real humility about how much macro prudential tools can find you some risks rather than having really robust structures policy makers historically not obviously the ones on these panel have not been very good at telling when times were exuberant and at a time when Janet Yellen tells us that inflation is still a mystery which is let's face it the primary goal of most central banks I certainly have humility and I'm sure others this panel will have too really think about gaps and weaknesses very quickly I want to think about European SMEs as we try to get more companies or projects or infrastructure projects to come to the market these are going to be small idiosyncratic non-investment grade or debutants each and every one of which are a little bit riskier for a retail investor we've got USITS funds which require daily liquidity these are the wrong owners of this paper insurance companies due to 72 are dissuaded from owning the securitisation of this paper and we don't have a pan-European private placement market and so I would just urge this is an area where I think the ECB and ESRB did some great work around securitisation a couple of years ago I think a private placement market for Europe is an area which I see as a maybe not classically viewed as macro-potential policy but I actually think could be one which could be championed and thinking through both the prospectus directive, the insurance regulation, the fund structures and so on it's a holistic problem which falls between gaps of well-intentioned policies third is cyber risk look on fintech the topics which I normally get asked are will the banks be Amazon and will non-bank financial skim the cream so what's left to be regulated is more problematic but I think the much more interesting question is the dependent growing dependence of banks on large technology companies to run the infrastructure to give us pause for thought about where is the risk in the system I'm not saying it's easy to then run stress tests of Microsoft and the like but at least we should have our eyes open that the train tracks are now being run beyond the banking system and a particular cyber risk stands out for me as probably the single biggest area of risk I'm not trying to pick on anyone but just take Equifax last week 143 million Americans data was hacked about just under half a trillion Europeans data was hacked this is not to say it's systemic but the scale should just underscore for us all quite how big a risk this could be and I think that's an area and I think Lex I'm sure will have some interesting comments on cyber risk clearing houses I'm conscious of time so I'm going to turn briefly to my last topic which is Bitcoin look I sit here in the hallowed rooms of the European Central Bank and I know few issues in central banking provoke more anxiety than losing control of one's currency and clearly Bitcoin has provided a perfect illustration of this with the Chinese authorities clamping down the question du jour is whether Bitcoin is a currency a security a fraud or something else well going back to the Charles Charles Goodheart taught me well the classic rules of a currency is it's a store of value well it's moved 25% in nine days it's probably not is it a useful medium of exchange non plus a friend who works in a tech company where they accept Bitcoin for coffee found the coffee was disgusting so he tried to return it the value of Bitcoin moved so much they refused to take his coffee back so you know it's not a useful medium exchange and digital currencies are not as secure as promoted because these exchanges have been hacked in large size so it's not a currency let's just it's possibly a security so poor Stephen may have another responsibility on the ones that Mario put on him last week I don't think that clamping down on initial coin offerings will stop speculators enthusiasts the simple truth is printing money is a very profitable business and certainly one which has been important and that's why throughout history printing currencies has been the domain for kings and queens but I think that this is an area where macro policy just needs to think through what is the right way to assess what something which is small but clearly has risks which might infect the banking system through money money ring laundering know your customers or potentially through other risks and I don't think I have in four seconds a policy pronouncement but it's something that I think is an area which could be on banking be important thank you thank you very much for all the topics including the last one which indeed I am surrounded by two Dutch nationals so I can say that Bitcoin is a sort of tulip it's indeed an instrument of speculation for those that want to bet in something that can go up and down 50 or 40 percent in a few days but certainly not a currency and certainly we don't see it as a threat to central banking or monetary policy so that's for sure very good but precisely your last point appealing to the discussion of the issue of cybersecurity leads me to now as we have time so I thank the panelists for having kept the time that they had allotted I will start by a short phase of interaction among the members of the panel so Lex you can start okay Lex three quick quick points first a response to your challenge on the anti-proseclicality and let me a bit clarify what I have in mind I was referring first of all to anti-psychlicality policy in CCP so that's my that's the first point then I think there are very strong arguments for having such policies but there are also strong arguments for having them not as discretionary policies that would lead to additional uncertainty it could be counter-predictive and you have to be aware that's quite a number of the markets you are talking about are really global markets by now and that would create a huge coordination effort if you want to intervene in a discretionary way and you will never have the data for doing that in the right way you would run the risk of making huge mistakes you would upset you would create uncertainty of the governance of the CCP is it a large of setting the margins is it a CCP or is it a corporation of regulators it's far better to go the road and further develop the road that I refer to do it rules-based and translate your anti-psychlicality requirements in requirements for the models that you use in setting the margins and for the procedures that you do so I think we agree on the necessity of anti-psychlicality margin but I do think we disagree on whether that should be done in a discretionary way or more in a rules-based way second remark and I will only make two also give the others room that's more a concern that I hinted at in my introduction and that's more the direction that I see macro potential policies moving into I think the objective is far too ambitious for what is possible systemic risk containing systemic risk I think is simply too pretentious systemic risk itself as a concept is more operational it is not measurable it would trying to measure it leads to huge data requirements you will always conclude that there are data gaps the previous panel was an example of that I think I've never so far attended any conference or macro potential where not one of the conclusions was we need more data and we need further research and I here make the prediction that in 10 years time when we sit here that will still be the conclusion if we go that route we will all be very tired of having collected all kinds of information but you have no clue what to do with it and it doesn't in the end the perfect becomes the enemy of the root so the objective I think a realistic objective and that is feasible is creating the right conditions for a resilient financial system and not only look at the in the narrow base tools that you have as a macro potential supervisor but focus on what is required from the other policies for instance that struck me Gabriel in your introduction I think it's very interesting what you are doing and I think it's useful for the insurance sector it's sector policy it's not macro potential policy in my mind so look at the other policies and one perhaps provocative question at the end if I look back over the past 40-50 years or so and if you roughly want to see what has happened in terms of potential building up systemic fragility systemic uncertainty what strikes out is the enormous growth of financial markets and the financial system just one figure that I know by heart and again it's for the Netherlands I'm happy that there is a lot of focus in our country this afternoon early 70s the size of the financial sector in total in the Netherlands was around 150% of GDP and it's exploded to 600% of GDP my question is isn't there a responsibility of monetary policy for allowing that for making that to happen and it's not one of the elephants in the room is monetary policy and we can look at all kinds of details of individual sectors in great detail and focus on the policy requirements of other policies I think we are missing what is it, the trees for the books yeah well you just alluded to two points that are hugely controversial that's why I did that yeah right and to spring those at this time of the panel it's really a bit unfair it's really a bit unfair because I could not disagree more with your two points and just that macro proof should be only about resilience and nothing about smoothing the financial cycle because there are no good indicators of systemic risk I would defy that there are many attempts of having indicators and in particular there are the synthetic indicators composite indicators that it can be approved and showed by backward testing that are good predictors of crisis and they are not so complicated to gather the information on those indicators this is not about micro granular information for instance and that leads me to the second point to say that the growth of the financial sector is huge well that in itself history proves it is a sort of early warning about the crisis to come but which then leads after the crisis we have now a segment of literature on finance that shows or tends to prove that there is already too much finance field of research but I would submit that it's not for interest rates to control that because that has expanded and exploded for all sorts of other reasons which could only be addressed by regulatory measures and not by monetary policy but I fear that we have to stop here this huge debate and leave it for another time but fair enough enough I don't agree with your Dutch metaphor which I have heard you use once I think which is that macro proof is about building the protection and not to control the ocean the tides it's about your Dutch knowledge of containing the sea and not about smoothing the sea the analogy the metaphor can be interesting but it's not in my view appropriate I restrain myself thank you very much Gabriel thanks a couple of points on what was mentioned let me start by this one in terms of that you mentioned that we cannot see things in isolation totally in agreement and that's precisely if you look at the kind of conceptual framework that we are trying to devise it's precisely to look at that to try to put the insurance in the context of the overall financial market and what kind of externalities you can see there I can give you an example you need to really understand the activities of insurers and the type of asset liability management that they do in order to understand then also the possible externalities an insurer for example holding a lot of derivatives it's completely they're backing basically edging a certain type of business and a certain type of liabilities or if it is non-edgable if they're not using these foraging purposes so I think that it's very much important to understand what are the characteristics of the activity because this at the end of the day brings the risk profile on top of it and when someone was mentioning of course all these boom of investment funds to be really important to look from a macro potential perspective to the investment fund area to understand to what extend a good part of these of these investment funds are owned by institutional investors namely pension funds and insurance companies that have certain types of liabilities backing them so when you look from a stress perspective to investment funds you need to understand what is the risk profile of the liabilities that are backing then these asset exposures and so it is very important to understand this not in an isolation perspective because you will have different types of externalities depending on the activities and the risk profiles of in this case of course where the asset exposures are in and that's why it's very important to have data and I totally agree with you that if you talk with supervisors and researchers data is never enough that's obvious but I think that let's be also honest we're coming from a situation where we were basically driving a car without having sufficient information on this that's clear so we are now much better we have of course for example in Solvency 2 we have now harmonized information around Europe we have a centralized database in AOPA that we are starting really to use to understand better all these elements of interconnectedness also we have now a consultation on pension funds together with ECB that we have worked quite well together also to understand and to get better data from pension funds that are also quite active in the market so I think we're going in the right direction definitely let me just mention another point which is on the on the cyber on the cyber risk just that point I think it's a very important one and I couldn't agree more that we are not looking at I would say so closely and we should look at the clouds the information that is from the all the financial system now resident in clouds hugely concentrated if there's a cyber attack I think we can have really some problems in terms of a systematic event very good yes Stephen please a few a few short comments I think first on the role of asset management and the linkages to let's say the insurance sector and pension funds the biggest link is between the mandates so if you look at the EU asset management sector about half of it is funds the other half is about mandates that they get and these mandates are indeed mainly in family services insurance company pension funds and basically they are managing on behalf of the the client their balance so I think there is that is a very different type of asset part of the asset management industry than the fund but it's right and part of the fund industry the funds themselves end up also on the balance sheets of pension funds and insurance companies on the issue about time varying or should we hardwire stability to the system I think it was not only my fellow Dutchman that had a preference for that model but I understand also you had some preference for them and it might also be just a reflection of how advanced you are in securities markets but indeed I think considering where we currently are and our thinking it seems to be it is so difficult to predict where we are in the cycle in the financial markets I would be so I'm completely into central clearing because it makes the system safer I can see also going for explicit leverage limits in the AFMD sector but then making also the next step and to say we need to make this time varying I don't think we have the models the intelligence the data to do that at this stage in a credible way very briefly on ETFs on ETFs I know that this has been raised as a concern I would like to make a few short remarks on ETFs first of all the benefits of ETFs from a consumer protection perspective are clearly there and it's very awkward that in the EU active manage active funds end up more in the hands of final consumers than in the industry and so the professional investors so professional investors more use ETFs than retail consumers and that questions is there a problem with miss selling etc secondly we know at this stage is that active investment still has a very poor record and that indicates that there is no bubble or at least not an easily identifiable bubble in the sense that if you use research and trying to identify over or under valuations it doesn't result in a lot of success so I would be very nuanced and careful about saying ETFs is the next big struggle it is also an area where I can see positives for the consumer side of financial markets thank you Stephen so Mario you want to just to be very clear given that I raised ETF it didn't mean at all it is the next bubble I just said it is worth looking at that in relationship to what you said to the dimension of one vis-a-vis the others so if the dimension of one and the other change is worth looking at that the benefit for the consumer are obvious and no doubt on that maybe one simple point on cyber where I agree very much with my neighbor here but I think the cyber risk go all across it is not only a non-banking issue of course they can devastate a bank much more than a non-banking the EC has made the digital single market and the protection of it one of the priorities so I think that on that we fully agree on the other hand slightly disagree with Lex on the fact that data gaps is an easy conclusion I think that the progress we have made in the last few years in terms not only of collecting data but also in terms of reducing the cost of collecting data because the proposal on data collection that we give to Esma the power that we give to Esma is exactly for that it's not to have more data but to have the same data at a much lower cost so I think that that deserves attention you were the last but you still have an opportunity the only thing I'd so the two things I'd say is one on Gabrielle I mean I agree we need to understand the type of owners of different paper but I am struck during the crisis it was sophisticated investors often who end up in the first to pull the trigger so actually I'm not sure necessarily even though they did have long term liabilities and second I don't think any of us know yet what market to market accounting will do to their propensity to sell so I just actually have a bit of humility whether institutional investors will actually be so long termist there I also am I think the big exam question maybe I won't put it quite how lexed it is is going from quantitative easing to quantitative tightening is probably the big exam question for our table and I think it is a difficult one to have in five minutes yes of course we will see it will be as has been announced in the US it will be a very gradual process so I now stop and open the Q&A