## Macro PrudentialPolicyCalibration

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**Canonical URL:** [Macro PrudentialPolicyCalibration](https://www.imf.org/-/media/files/news/seminars/mcm-lseelizondo_session5.pdf)

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### Background and context
- The IMF (MCM) – LSE (SRC) Symposium “Macroprudential Stress Test and Policies: A Framework” was held December 15-16, 2016 in Washington D.C.
- Mexico experienced a relevant banking crisis in 1994 (1994 Peso Crisis).
- Since then a strong regulatory framework has been gradually put in place (Basel3 compliant in 2016).
- The framework promoted resilience of individual banking institutions under conditions of uncertainty and volatility such as the 2008 crisis and the 2016 US election (reflected as high volatility of risk factors such as FX, Interest rate).
- Indirect channels of contagion in the past generated systemic vulnerabilities (firesales, illiquidity of securities markets and interbank market, etc.) that led to development of macroprudential policy tools separable into two groups:
  - Preventive: Promote cycle attenuation (systemic “Going concern”)
  - Mitigating: Promote cycle reduction (systemic “Gone concern”)

### Preventive macroprudential policy
- Preventive macroprudential policy has taken the form of capital buffers (countercyclical and locally systemic bank buffer) and loan loss provisioning requirements that are forward looking and take into account systemic risk variables as arguments for accumulation or disaccumulation of loan loss provisions (global indebtedness of counterparts, labour mobility, etc.).
- Capital buffers are treated in the LSE/IMF paper and no significant difference has been developed in Mexico as compared to Basel3 recommendation hence not mentioned further.

### Mitigating macroprudential policy: interpretation and emphasis
- “Mitigating” macroprudential policy is interpreted as regulatory measures set in place prior to the occurrence of a systemic event that allow authorities to contain and interrupt Systemic Risk Amplifiers (SRA).
- Mexican experience indicates emphasis should be given to segments of the financial system outside the banking system.
- 2008 mortgage crisis Mexican case — high volatility in risk factors did not by itself generate a systemic event within the banking system but manifested outside the banking system:
  - i) AAA corporate debt defaults due to idiosyncratic imbalances,
  - ii) illiquidity of overall private debt markets,
  - iii) mutual fund runs and pension fund losses and firesales,
  - iv) illiquidity of interbank markets and long term government debt.

### Mitigating macroprudential measures implemented
- Pension Funds
  - Deactivation of firesales caused by investment regime triggers: Whenever a pension fund exceeds investment limits due to exogenous variations of the quality of assets, it can now request the authority permission to keep such excess temporarily while stress conditions prevail.
  - Deactivation of procyclical Value at Risk (VaR) limits: VaR limits are no longer cyclical because pension funds incurred VaR breaches during volatile market conditions that promoted firesales and further volatility.
- Mutual Funds
  - Mutual funds redemption facilities: Mutual funds are now able to create “side pockets” that separate liquid assets from illiquid assets and hence provide to investors equal conditions for redemption. This measure is meant to reduce the spread of panic due to full cancellation of redemptions as observed in 2008 that generated loss of confidence in the system.
- Banking system
  - Bond swap facilities provided by the Central Bank: In October 2008 Mexican authorities announced the possibility of operating interest rate swaps with domestic credit institutions (upto MXN50,000millions).
    - These operations allowed modification of the interest rate term risk structure preventing firesales that could have worsened the effect of the crisis. Five auctions took place where Banco de México received a fixed 10-year period rate and in exchange paid 28-days Mexican interbank rate (TIIE).
  - Lender of last resort liquidity facilities: Readily available with clear predefined rules and contracts. Banks are required to monitor and report periodically potential collateral.
- Development Banks
  - Credit guaranty support: To solvent corporations that face illiquid debt markets (Sofoms and corporates 2008).
  - Market making facilities: Improve price discovery and overall liquidity in markets (Securitization markets 2008).
  - Continued financing to hailing sectors: house construction industry 2013, mortgages 2008, SMEs 2008, etc.

### MaPST–MAPP process and stress testing design
- The process elements identified:
  1. Data Collection
  2. Design of Stress Testing
  3. Scenario
  4. Models of Impact on Bank Business
  5. Design and Calibration of Macroprudential Policy and Impact Mitigation Measures
- Emphasis: Macroprudential stresstesting is needed to calibrate “preventive” MAPP but is incomplete if the transmission of stress conditions on the behaviour of markets is not modelled differently.
- Final recommendation: Use MaPST as an exploratory tool for detection and measurement of Systemic Risk Amplifiers and, importantly, enact appropriate regulatory policy in normal times that mitigates its effects.

### Data collection infrastructure and granular data
- Mexican authorities constructed a substantial infrastructure of granular data since the 1994 crisis.
- Common data sources representative of the entire banking, financial, or economic system include:
  - National Statistics Bureau
  - Banco de México surveys
  - Financial reports from the markets
- Granular information collected for direct contagion analysis:
  - Derivative positions (Futures, Forwards, Options, Swaps)
  - Securities positions
  - FX positions
  - Repo transactions
  - Debt issuance
- Granular information of loans by type:
  - Corporate and SMEs Loans
  - Credit Card
  - Financial Entities
  - Non-Revolving Consumer
  - States & Municipalities
  - Mortgage
- Layout includes information related to: loan characteristics, payment behavior, collateral, loan rating, PD, LGD.

### Data collection insight: PEMEX example
- Banco de México requested the national oil producer company (PEMEX) the list of unique identifiers of suppliers of the company so as to identify all loans granted to them by banking institutions.
- Availability of granular data by financial authorities allowed a timely estimation of the banking capital ratio of banks under a hypothetical disruption of the PEMEX producing chain.
- Capital ratio “what if” analysis included:
  - Capital ratio (before & after)
  - Change in capital ratio (basis points)

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_Source: https://www.imf.org/-/media/files/news/seminars/mcm-lseelizondo_session5.pdf_