IMF Discusses Central Banking Lessons from the CrisisPublic Information Notice (PIN) No. 10/89
July 20, 2010
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On June 18, the IMF’s Executive Board discussed the lessons from the crisis for central banks. Policymakers are beginning to incorporate the lessons of the crisis for policy frameworks, including those for systemic financial stability, prudential regulation and supervision, monetary policy, liquidity management, and crisis management. Central banks were thus the main institutional focus of the discussion, although there were also implications for regulators separate from central banks. While the discussion considered mainly the issues facing advanced economies, the lessons are applicable to a wide range of economies.
Executive Board Assessment
Executive Directors welcomed the opportunity to reflect on lessons for central banks drawn from the crisis and on important questions regarding the relationship between monetary policy and macroprudential issues. Directors had a wide-ranging discussion on these important issues and broadly agreed with staff’s analysis and conclusions, while noting that there are still significant gaps in knowledge in some areas.
Directors concurred that financial stability should be primarily addressed using a macroprudential framework that integrates macroeconomic and systemic financial considerations and builds on microprudential supervision. They noted that the effective use of tools such as capital requirements and buffers, forward-looking loss provisioning, liquidity ratios, and prudent collateral valuation, could reduce systemic risk by mitigating procyclicality and the build-up of structural vulnerabilities. Directors considered that the macroprudential framework should be based on robust rules, although rules would generally need to be complemented by judgment, particularly in view of the limited experience thus far with macroprudential policies. They also noted that the macroprudential regulatory perimeter would need to encompass all potentially systemic financial institutions.
Directors generally agreed that central banks should play an important role in macroprudential policies, regardless of whether they serve as the main financial regulator. They noted that considerable work remains to operationalize macroprudential frameworks. They encouraged further progress in this area and also on institutional arrangements to ensure that macroprudential policies flow from a clear mandate with strong governance and accountability.
Directors also broadly agreed that price stability should remain the primary objective of monetary policy, and emphasized the importance of preserving central banks’ hard-won credibility, which has been critical in anchoring inflation expectations. They noted, however, that increasing efforts should be made to monitor and assess systemic financial developments and risks. Such analysis can be better integrated into the formulation and implementation of monetary policy, and there may be limited scope to use interest rate policy to “lean against the wind.” In this regard, careful attention needs to be paid to the impact on credibility and accountability of bringing financial stability considerations into the policy framework.
Directors noted that experience so far suggests that some good practices have been acquired for unconventional central bank measures. The effectiveness of these measures is enhanced by an explicit objective, clearly explained transmission, transparency and protected central bank balance sheets.
Directors considered that central bank liquidity and crisis management can be refined to enhance flexibility to deal with episodes of stress, although there is no single best approach. They noted that institutions and markets that are potential recipients of liquidity support in times of stress should be monitored and regulated. Directors also agreed that a continued and sustained effort to improve payment and settlement systems and crisis management coordination is warranted.
Directors emphasized that preserving price stability and central banks’ monetary policy independence should be a key ingredient of reform efforts. In this regard, institutional arrangements would need to be put in place to ensure that the role of central banks in the design and application of macroprudential measures does not impinge on their ability to deliver price stability, which may require further thinking on appropriate governance frameworks. For instance, the policy roles of the central bank, the government, and other entities would need to be clearly delineated in the wake of their broadened scope of intervention during the crisis.
Directors noted that central banks and other public sector entities are enhancing the role of systemic financial stability in their policy frameworks. They encouraged close collaboration with other international bodies and country authorities in these efforts, including by helping develop the needed analytical tools, fill key data gaps, and disseminate information and lessons learned from the crisis.