The Financial Stability Committee (Ausschuss für Finanzstabilität) is the central body for macroprudential supervision in Germany. The purpose of macroprudential supervision is to limit systemic risks and strengthen the resilience of the financial system in a preventive manner. Macroprudential means looking at the stability of the financial system as a whole. To this end, the Financial Stability Committee identifies and addresses threats to financial stability. It was established at the beginning of 2013 on the basis of section 2 of the Financial Stability Act (Finanzstabilitätsgesetz). The Financial Stability Committee includes representatives of the Federal Financial Supervisory Authority (BaFin), the Bundesbank and the Federal Ministry of Finance, as they play a central role in safeguarding financial stability in their functions as supervisory authority, central bank and competent ministry respectively.
A stable financial system provides the basis for sustainable economic growth. It enables businesses and individuals to obtain credit, to hedge against risks, and to make payments swiftly and securely. Within the financial system, financial intermediaries – mainly banks, insurers and investment funds – mediate between suppliers and consumers of financial resources and facilitate hedging against of risks and the settlement of payments, securities transactions and derivatives transactions. This is done via the financial markets and market infrastructures, such as payment or securities trading systems. Financial stability exists if the financial system can perform its functions smoothly at all times, even during periods of stress.
The creation of the Financial Stability Committee represents a key lesson learned from the global financial crisis of 2007/2008: The stability of individual market players does not necessarily guarantee the stability of the financial system as a whole. Threats to financial stability can only be identified by looking at the entire system. Even if individual financial intermediaries, such as banks, appear stable themselves, the system as a whole can be vulnerable. For example, vulnerabilities can arise because financial intermediaries are interconnected as a result of lending to each other or engaging in similar transactions. Negative developments can be amplified if they occur unexpectedly and intersect with a vulnerability in the financial system. This can happen, for example, if a large number of financial intermediaries sell securities at the same time in response to a recession and banks reduce lending to businesses and households, thus significantly exacerbating the recession. If the functioning of the financial system is disrupted in such a manner, the ultimate result is that economic performance declines, unemployment rises, and public and private debt increases. The financial system must be sufficiently resilient in order to be able to counter such contagion and feedback effects. This refers to the ability to absorb losses from unexpected developments. A macroprudential supervision body thus needed to be established that would keep an eye on risks that could jeopardise the functioning of the entire financial system and ultimately have a significant negative impact on prosperity. In this way, macroprudential supervision complements microprudential supervision, which focuses on individual financial intermediaries.
The central functions of the Financial Stability Committee comprise monitoring the risk situation and resilience of the financial system in a preventive manner and engaging in communication regarding risks to financial stability. In addition, the Financial Stability Committee publishes warnings and recommendations as needed. These are intended to draw attention to risks or, for example, to recommend the use of macroprudential instruments. Regular meetings are held to discuss assessments of the risk situation, the resilience of the financial system, and new developments and their implications for financial stability. If the Financial Stability Committee concludes that risks to financial stability are building up, it can issue warnings or make recommendations to the German government, BaFin or other public bodies in Germany. The Financial Stability Committee can invite external experts to its meetings as needed. The Committee’s deliberations are confidential, in accordance with the Financial Stability Act. However, the Financial Stability Committee reports annually to the German Bundestag and the public, thus ensuring transparency. In these reports, the Financial Stability Committee provides information on its activities and shares its assessments of stability within the German financial system.
At the same time, the Financial Stability Committee functions as an interface with macroprudential supervisors across Europe. It serves as point of contact for the European Systemic Risk Board (ESRB) and the macroprudential authorities of other EU member states. The Financial Stability Committee communicates its warnings and recommendations to the ESRB. Similarly, it also provides advice with regard to warnings and recommendations addressed to Germany by the ESRB.