IMF Executive Board Discusses Macro-Prudential Policy: An Organizing FrameworkPublic Information Notice (PIN) No. 11/46
April 8, 2011
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 April 4, 2011, the Executive Board of the International Monetary Fund (IMF) discussed the policy paper on Macro-Prudential Policy: An Organizing Framework.
One of the key lessons of the recent crisis is the need of a policy framework to address the stability of the financial system as a whole. In the run-up to the crisis, policy makers were comforted by growing profitability figures of individual financial institutions just when system-wide financial vulnerabilities were building up. In particular, the system had grown more complex, opaque, and interconnected through on and off-balance sheet exposures; accelerating asset-growth had left the financial institutions over-leveraged; and, financial intermediation had shifted to the “shadow” banking sector. Also, policy makers did not have effective mechanisms to deal with systemically important institutions. Thus, there was a grave need of a policy structure aimed at ensuring systemic financial stability—a macro-prudential policy framework.
Macro-prudential policy limits systemic risks by using primarily prudential policy tools to dampen the build-up of financial imbalances and to establish buffers that could be drawn on during downswings to limit their speed and their effects on the economy. This is the so called “time-dimension” of systemic risk. The policy also identifies and addresses the degree of interconnectedness of financial institutions to limit the effects of contagion and spillover risks during stresses in the system. This is often termed as the “cross-sectional dimension” of systemic risk.
The paper aims to clarify the concept of the macro-prudential policy and its role in preserving financial stability. National policymakers have been grappling with this, both at the conceptual level and in practical terms. This uncertainty is reflected in the results of a survey that the Fund conducted in late 2010 of country practices in this field. The Paper contributes to the development of a consistent framework for macro-prudential policy.
Executive Board Assessment
Executive Directors welcomed the opportunity to have an exchange of views on initial considerations for the elaboration of a macro-prudential policy framework. They generally agreed with key aspects of the staff’s analysis, which includes the objectives, the policy toolkit, and the institutional setup for macro-prudential policymaking. Directors noted the timeliness of this work, stressing the need to develop common concepts for macro-prudential policy as a number of countries are moving ahead with its design and implementation.
Directors broadly agreed with the proposed definition of macro-prudential policy and its objectives, noting that the primary goal of such policy should be to limit the buildup of system-wide financial risk over time or across financial systems and countries. Directors stressed that macro-prudential policy should be viewed as a complement to macroeconomic and micro-prudential policies, and noted that, boundaries between macro-prudential and other policies, particularly micro-prudential ones, are not easy to draw in practice.
Directors shared the staff’s view that the analytical and operational underpinnings of macro-prudential policy are still incompletely understood. They acknowledged that the measurement of systemic risk would be challenging, and highlighted the need to expand data availability to strengthen the monitoring of such risk. Directors emphasized that progress will depend on developing robust approaches for measuring systemic risk and on improving the capacity to detect its build up.
Directors considered that progress in addressing data gaps has been lagging and that efforts need to be intensified as more granular information would help identify emerging imbalances. A few Directors, however, were of view that it is important to recognize the confidential nature of firm-level financial data and the administrative burden of disclosure on financial institutions.
Directors concurred that, to ensure macro-prudential effectiveness, the institutional design should support a policymaker’s ability and willingness to act. In this context, they emphasized the need to tailor institutional arrangements to country contexts and that due attention should be paid to coordination with other policy areas without impinging on operational independence. They agreed that more needs to be done to establish criteria for assessing the effectiveness of different institutional setups. A few Directors noted that information sharing among agencies could be more important than having a set institutional framework or a stand-alone macro-prudential authority.
Directors recognized that more analysis and experience is needed to understand how macro-prudential instruments should be designed and calibrated and how they interact with other policies. They supported further analytical work by the Fund in this area, including case studies and cross-country comparisons.
Directors identified broad directions for further work, which would help the Fund facilitate the development and sharing of best practices throughout the membership. They noted that such work could focus on further clarifying policy objectives; on the operational toolkit; on methods of systemic risk identification and monitoring; and on domestic and international cooperation across policies to limit systemic risks and preserve financial stability. More broadly, Directors encouraged the staff to work closely with other international institutions, notably the Bank for International Settlements and the Financial Stability Board, on the development of a macro-prudential policy framework.