## ppea2022011

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**Canonical URL:** [ppea2022011](https://www.imf.org/-/media/files/publications/pp/2022/english/ppea2022011.pdf)

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### Overview and guiding principles
- Preemptive CFM/MPMs should be effective (achieve intended goal and not be easily circumvented) and efficient (minimize distortions and costs).
- Design principles follow from the 2012 Institutional View (IV) and the Fund’s macroprudential policy framework and include:
  - avoid using CFMs/MPMs as a substitute for necessary macroeconomic adjustment;
  - use the policy instruments that are the most effective, efficient, and direct, and the least distortive in addressing the policy objective;
  - seek to treat residents and nonresidents in an evenhanded manner.
- Measures should be transparent and generally temporary.
- Appropriate design depends on country circumstances, including institutional and legal constraints, and the precise source of the vulnerability.
- Where measures that do not discriminate by residency are available and effective, they should be preferred.

### Targeting FX mismatches at source
- Preemptive CFM/MPMs should be targeted at the specific sector(s) and financial transaction(s) giving rise to FX mismatches (financial sector, non-financial corporate sector, household sector), including type and maturity of instruments.
- Measures should target FX mismatches either on balance sheets overall or at relevant shorter maturities.
- Examples of sectoral measures are summarized in Table 1 (see sectoral breakdown below).

### Calibration, efficiency, and trade-offs
- Measures should be calibrated to address FX mismatches effectively while minimizing impacts on capital flows, domestic credit, output, or market functioning (IMF, 2014).
- Prefer the most efficient preemptive CFM/MPMs—those that minimize distortions and costs among alternatives targeting the same risks.
- Narrowly targeted designs:
  - help contain unintended side-effects and reduce scope for curtailing other capital flows or creating distributional effects;
  - are more prone to circumvention, so should target risks as closely as possible without undermining effectiveness.
- Price-based measures (e.g., higher reserve requirement on non-resident FX liabilities):
  - can be easier to adjust and less distortionary than volume ceilings if well calibrated;
  - may face practical challenges (legislative hurdles for taxes, administrative capacity) and informational obstacles to enforcement.
- Flow-targeting measures that encourage shifts toward less risky flows (e.g., higher levies for shorter maturities) can reduce systemic risks with relatively limited effects on overall capital inflows and the exchange rate.
- Regardless of instrument type (administrative, price, quantity), calibration must be commensurate with the policy objective and avoid precluding reasonable access to external borrowing (e.g., do not set credit rating requirements, all-in-cost ceilings, or hedging requirements so strict they block nearly all borrowing).

### Building resilience and reducing amplification
- Measures that increase resilience to aggregate shocks and reduce amplification from interactions with other systemic-risk drivers are useful.
- Designs that build buffers can limit adverse effects when borrowers face solvency or repayment capacity limits.
- Examples: maximum leverage limits for corporates based on external FX borrowing, levies on external FX liabilities that feed a dedicated resource of liquid FX assets for rollover episodes.

### Implementation, adjustment costs, and temporal considerations
- Adjustment costs:
  - Measures affecting new flows typically impose smaller adjustment costs than measures applied to the stock of existing FX liabilities.
  - Measures limited to new flows (e.g., marginal reserve requirements) can have strong effects on new flows while avoiding adjustments for existing liabilities.
  - When measures must affect stocks (e.g., calibration on existing external borrowing), phase-in or stepwise tightening can mitigate adjustment costs.
- Residency neutrality:
  - Measures that do not discriminate by residency are preferred; MPMs (non-residency-discriminating, not designed to limit capital flows) are always preferred when available and sufficient.
  - A CFM/MPM should be used only when MPMs are not available or insufficient.
- Transparency:
  - Clear communication of objectives, measures, and conditions for removal/adjustment helps avoid disrupting market and public expectations.
  - Timely announcement and explanation facilitate understanding by targeted sectors and set accurate expectations for removal/adjustment.
- Periodic reassessment:
  - CFM/MPMs should be reassessed periodically and recalibrated if vulnerabilities subside or less distortive tools become available.
  - Regular review should evaluate continued effectiveness, emergence of circumvention, and side effects; seek alternatives that do not discriminate by residency or are less distortive.

### Table 1 — Illustrative measures by sector and mismatch type (non-exhaustive)
- Note: measures marked with * discriminate on the basis of residency and will always constitute CFMs or CFM/MPMs. Some measures can address both balance sheet and maturity mismatches but are recorded once.

- Banks and NBFIs — FX balance sheet mismatch:
  - Capital requirements based on the net open FX position
  - Constraints on the net open FX position
  - Limits on FX derivatives positions
  - Limits on banks’ lending in FX
  - Caps on credit growth in FX
  - Taxes on foreign inflows of capital*
  - Limits on FX borrowing from abroad*
  - Higher (marginal) reserve requirement on FX than local currency liabilities
  - Higher (marginal) reserve requirement on FX liabilities to nonresidents than residents*
  - Sectoral capital requirements (risk weights, loss given default floors) for banks’ FX lending to (unhedged) NFCs
- Banks and NBFIs — FX maturity mismatch:
  - FX liquidity coverage ratio (LCR)
  - FX net stable funding ratio (NSFR)
  - Caps on FX loan-to-deposit (LTD) ratio
  - Maturity dependent levies on banks’ non-core (e.g., short-term non-deposit) FX liabilities
  - Higher (marginal) reserve requirement on short-term than long-term FX liabilities
  - Higher marginal reserve requirement on the new flow of short-term non-resident FX liabilities*
  - Maturity-dependent constraints on external funding in FX*

- Non-financial corporations (NFCs) — FX balance sheet mismatch:
  - Requirements on NFCs to hedge FX exposures
  - Tighter lending standards on banks for (unhedged) FX lending to NFCs
  - Loan-to-value (LTV) and/or debt service coverage (DSC) limits for CRE loans in FX
  - Caps on banks’ sectoral FX credit growth
  - Maximum leverage requirements based on NFC’s borrowing from abroad in FX*
  - Minimum requirements for NFC’s credit rating for external borrowing*
  - Taxes on foreign inflows of capital*
  - Limits on (unhedged) NFCs’ FX borrowing from abroad*
  - Sectoral capital requirements (risk weights, LGD floors) for banks’ FX lending to (unhedged) HHs

- Non-financial corporations (NFCs) — FX maturity mismatch:
  - Liquid asset requirements on NFCs which borrow (unhedged) in FX
  - Maturity dependent interest rate limits with which NFCs can borrow (unhedged) in FX from abroad*
  - Maximum leverage requirements based on NFC short-term FX borrowing from abroad*
  - Unremunerated reserve requirement on NFC short-term borrowing in FX from abroad
  - Minimum liquidity ratios between short-term FX assets and liabilities for NFCs borrowing abroad*

- Households (HHs) — FX balance sheet mismatch:
  - Sectoral capital requirements (risk weights, LGD floors) for banks’ FX lending to (unhedged) HHs
  - Tighter lending standards on banks for (unhedged) HH borrowing in FX
  - Tighter LTV, debt-to-income (DTI), and/or debt-service-to-income (DSTI) limits on (unhedged) FX mortgage loans
  - Differentiated stamp duty rates on (unhedged) HHs with FX mortgage loans
  - Caps on banks’ sectoral FX credit growth
  - Tax on household borrowing from abroad*
  - Limits on (unhedged) HHs’ FX borrowing from abroad*

- Households (HHs) — FX maturity mismatch:
  - Unremunerated reserve requirements on HH short-term borrowing from abroad in FX*

*This table includes a non-exhaustive list of measures that in practice may be MPMs, CFMs, or CFM/MPMs depending on their objectives and design. Measures affecting cross-border financial activity that discriminate on the basis of residency (marked with *) will always constitute CFMs or CFM/MPMs.

*Source: ppea2022011*

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_Source: https://www.imf.org/-/media/files/publications/pp/2022/english/ppea2022011.pdf_