A critical analysis of the functions of the European Systemic Risk Board and the effect of macro-prudential supervision on Malta

Abstract

In the aftermath of the Global Financial Crisis of 2007, regulators, academics and practitioners alike were in agreement that financial regulation was due for a reform. As a response to the crisis, the European Union underwent a thorough and comprehensive overhaul of its financial regulation, leaving no stone unturned. One of the major changes was the emphasis placed on the stability of the financial system as a whole, which could only be achieved through macro-prudential supervision and regulation. The European Union formed, as part of its new European System of Financial Supervision, the European Systemic Risk Board, tasked with safeguarding financial stability and preventing systemic risk. A decade has followed since the foundation of this institution, and for all intents and purposes, this was a decade of relative financial stability and economic up-turn. In the meantime, a macro-prudential strategy has formulated both at a European Union level and at a national level. This research intends to study the effectiveness of macro-prudential supervision and regulation within Malta. To attain this objective, firstly the powers and the functions of the European Systemic Risk Board will be analysed, as this institution has undoubtedly shaped and formed the current macro-prudential strategy and policy direction, despite the soft-law powers which it has. Following this analysis, the effectiveness of macroprudential powers and instruments will be examined in relation to the Maltese regulatory architecture. The powers afforded to the local authorities will be dissected to determine their functions and their limitations. To truly understand how effective this regime is, the research will shift towards the policy response, which took place following the emergence of the COVID-19 pandemic, which may be considered as a first real challenge to financial stability not only for Europe but the global economy as a whole.