Threats to financial stability can only be identified by looking at the financial system as a whole. This is the function of macroprudential supervision. By contrast, the supervision of individual banks is microprudential (banking supervision).
The authorities responsible for macroprudential supervision monitor the financial system at the national and supranational levels to identify systemic risks and analyse whether they pose a potential threat to financial stability.
Macroprudential supervision is primarily a national responsibility and is closely coordinated at the European and international levels. In Germany, the Bundesbank, the Federal Financial Supervisory Authority (BaFin), and the Federal Ministry of Finance work together to prevent risks to financial stability via the Financial Stability Committee. At the European level, the European Central Bank (ECB) performs macroprudential supervision functions along with the European Systemic Risk Board (ESRB).
Within the framework of macroprudential policy, the purpose of macroprudential supervision is to strengthen the resilience of the financial system and mitigate systemic risks. Macroprudential monitoring analyses are used in this context.
In accordance with section 3 of the Financial Stability Act (Finanzstabilitätsgesetz), the Financial Stability Committee can make recommendations to the German government, BaFin or other public bodies in Germany. The recipient of such a recommendation must inform the Financial Stability Committee of the way in which it intends to implement the recommendation. It is required to keep the Committee informed of the progress of implementation on a regular basis. The recipient is required to provide a detailed explanation in the event it does not intend to implement a recommendation.
The Financial Stability Act assigns the Bundesbank a prominent role in the Financial Stability Committee. In particular, the function of the Bundesbank is to analyse issues relevant to financial stability and identify and assess risks.
The Bundesbank submits proposals to the Financial Stability Committee for warnings or recommendations to avert or mitigate any threats to financial stability it has identified on the basis of its analysis.
The Financial Stability Committee can use warnings and recommendations to formally warn of financial stability risks or to recommend actions aimed at increasing the financial system’s resilience to any such risks.
Recipients of warnings or recommendations can include the German government, BaFin or other public bodies in Germany. Recommendations identify actions that are appropriate to address identified threats to financial stability. The recipient is obliged to describe to the Financial Stability Committee how it has implemented the recommendation or explain why it does not intend to implement it. Recommendations can call for the use of macroprudential tools, such as increasing a capital buffer. The Bundesbank monitors and evaluates any such actions and forwards its assessment to the Financial Stability Committee.