## KEY ASPECTS OF MACROPRUDENTIAL POLICY — Content unit _061013b

## Source details

**Canonical URL:** [KEY ASPECTS OF MACROPRUDENTIAL POLICY — Content unit _061013b](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_061013b.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_061013b.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_061013b.pdf.json)

---

### Executive summary: purpose and core messages
- Purpose:
  - Provide a framework to inform the IMF’s country-specific advice on macroprudential policy.
  - Recognize that developing macroprudential policy is a work in progress and identify key issues to ensure effectiveness.
  - Date on document: June 10, 2013.
- Core messages and findings:
  - Macroprudential policy should aim to contain systemic vulnerabilities and not be overburdened with objectives it is unsuited to achieve.
  - Macroprudential policy must be supported by strong supervision and enforcement and complemented by appropriate monetary, fiscal and other financial sector policies; effective macroprudential policy can in turn help these policies achieve their goals.
  - Effective macroprudential policy requires the ability to:
    - assess systemic risk;
    - assemble and deploy the toolkit;
    - monitor and close regulatory gaps;
    - close data and information gaps.
  - Strong institutional and governance frameworks are essential, with appropriate strength of powers and clear accountability; the central bank needs an important role, with precise arrangements driven by political economy and traditions.
  - Cross-border implications call for international coordination to address lack of national action, differences in financial cycle phases, and home-host conflicts.

### Definition, rationale, and objectives
- Definition:
  - Macroprudential policy: use of primarily prudential tools to limit systemic risk.
- Systemic risk:
  - Risk of disruptions to the provision of financial services caused by impairment of all or parts of the financial system, with potential serious negative consequences for the real economy.
- Rationale rests on three systemic externalities:
  - (i) tendency of the financial system to amplify adverse aggregate shocks;
  - (ii) macro-financial feedback mechanisms causing overexposure to such shocks;
  - (iii) linkages within the financial system increasing vulnerability to idiosyncratic or aggregate shocks.
- Three tasks implied for macroprudential policy:
  - increase resilience by building buffers;
  - contain build-up of vulnerabilities over time and reduce procyclicality between asset prices and credit;
  - control build-up of vulnerabilities through interlinkages and large/critical institutions.

### Tools, scope, and examples
- Primary prudential tools listed:
  - countercyclical capital buffers and provisions;
  - sectoral capital requirements;
  - measures to contain liquidity and foreign exchange (FX) mismatches;
  - caps on loan-to-value (LTV) and debt-to-income (DTI) ratios.
- Other possible instruments and influences:
  - product design in retail markets;
  - changes to functioning and institutional underpinnings of wholesale markets;
  - tools traditionally associated with other policy fields (monetary: reserve requirements; fiscal: levies on wholesale funding; competition policy: takeover policies).
- Examples of specific tools and characteristics:
  - Countercyclical Capital Buffer (CCB):
    - Basel CCB requirement phased in gradually from 2016 to 2019; countries may consider accelerated phase-in.
    - Early adopters include China, New Zealand, Switzerland and the U.K.
    - Advantage: can be activated to increase resilience across a range of shocks; release expected to avoid credit crunch effects by reducing pressure on banks to deleverage.
    - Limitation: blunt and uniform across exposures; activation may have limited impact if banks hold voluntary buffers or can rapidly generate capital.
  - Sectoral capital requirements:
    - Targeted risk weights for mortgages, unsecured consumer credit, corporate lending, commercial property.
  - LTV and DTI limits (residential housing focus):
    - LTV: cap relative to property value; imposes minimum down payment.
    - DTI: restricts loan size to a multiple of household income.
    - Empirical effects: can reduce feedback between credit and prices, improve resilience, reduce default rates, boost recovery values; can have relatively strong effect on house prices and aggregate demand (supporting gradual tightening).
  - Liquidity tools:
    - Aim to reduce vulnerabilities from wholesale, short-term and FX funding; quantity- or price-based constraints.
    - Basel III liquidity standards include LCR and NSFR; complementary local tools cited (Macroprudential Stability Levy (Korea), Core Funding Ratio (CFR) (New Zealand), marginal reserve requirements).

### Relationship with other policies
- Monetary policy:
  - Strong complementarities and interactions; central banks have strong interest in effective macroprudential frameworks.
  - Interactions require coordination while preserving monetary policy independence and credibility.
  - Monetary stance can have undesirable side effects for financial stability (examples provided):
    - Low policy rates consistent with low inflation may still contribute to excessive credit growth and asset bubbles.
    - In small open economies, interest rate increases to address inflation can draw in capital flows that raise financial risks; interest cuts to counter subdued domestic demand may lead to large capital outflows jeopardizing domestic financial stability.
  - Macroprudential policy cannot be fully effective alone; monetary policy conduct needs to account for financial stability considerations.
- Fiscal and structural policies:
  - Necessary to reduce macroeconomic shocks that drive systemic risk; macroprudential policies alone may be insufficient where consumption booms are fed by capital inflows with persistent current account deficits.
  - Prudent fiscal policies essential to maintain sovereign debt safety and avoid adverse sovereign–financial system feedback loops.
- Tax treatment and Pigovian levies:
  - Corporate tax systems create a ‘debt bias’ (interest deductible, equity returns not); empirical estimates:
    - long-run tax effect on leverage ratio estimated between 0.20 and 0.27;
    - eliminating bias from a 25 percent corporate tax rate might increase banks’ capital in the long run by, on average, 3.75 percent of their assets: an increase of more than 30 percent over their current levels.
  - Tax treatment of housing (light/no tax on imputed rent, generous mortgage interest relief) can encourage borrowing and increase household vulnerability.
  - Financial Stability Contribution (FSC) proposed as a Pigovian levy:
    - Can discourage leverage and wholesale funding and be linked to financing a credible resolution mechanism.
    - Can be levied at a flat rate or varied to reflect institutions’ contribution to systemic risk and overall risk over time.
    - Around a dozen European countries—including France, Germany and the United Kingdom (U.K.)—and Korea have adopted bank taxes resembling an FSC.

### Operationalization: five key tasks
- Five steps to operationalize macroprudential policy:
  - Identify & Close Data Gaps;
  - Develop Capacity to Assess Systemic Risk;
  - Select & Assemble Macroprudential Toolkit;
  - Calibrate Tools, Communicate with the Public and Markets;
  - Monitor & Close Regulatory Gaps.
- Core operational requirements:
  - develop capacity to analyze systemic risk in time and structural dimensions;
  - select and assemble a set of macroprudential instruments;
  - calibrate tools accounting for benefits, costs and clearly communicate judgments;
  - continuously monitor regulatory gaps and close them timely;
  - fill data gaps impeding analysis of macro-financial linkages, tool design/calibration, and detection of regulatory gaps.

### Assessing systemic risk: indicators, structural analysis, and limitations
- Monitoring framework should consider:
  - growth in total credit and macroeconomic drivers of imbalances;
  - financial linkages between financial and domestic real sectors and with the rest of the world;
  - structure of the financial system and linkages within and across intermediaries and market infrastructures.
- Key empirical finding:
  - increases in the ratio of private sector credit to GDP (growth in credit relative to GDP or deviation from long-run trend) is the best single indicator of an increase in the probability of a crisis over a horizon of 1 to 3 years.
- Complementary indicators to use with credit growth:
  - prices of assets used as collateral;
  - borrower leverage (average and on new loans);
  - changes in lending standards (decreases in lending margins, increases in household and corporate leverage);
  - debt-service to income ratios for household and corporate sectors;
  - increases in exposure to interest rate and currency risks;
  - external imbalances (current account deficits and real exchange rate appreciation).
- Structural analysis variables:
  - leverage ratios, profitability, stress tests;
  - reliance on wholesale funding (ratio of non-core to core funding, ratio of credit to deposits).
- Interconnections:
  - new products and non-bank intermediaries can shift risk concentrations and create “too important to fail” institutions or funding fragilities; increased connectivity is not always higher systemic risk.
- Limitations and decision-making:
  - forward-looking properties of systemic risk measures are generally weak; combinations (credit-to-GDP and asset valuation measures) may be promising.
  - policymakers need clear, reliable signals/thresholds when to act; evidence suggests credit and property price growth beyond certain levels raises crisis probability over 2 to 3 years.
  - combine indicators and methods with qualitative judgment; slow-moving indicators detect build-up, high-frequency market-based indicators better predict imminent materialization.

### Selecting and assembling the toolkit — trade-offs and calibration
- No one-size-fits-all: countries should assemble a range of tools ex ante and consider interlocking use.
- Three complementary toolsets in the time dimension:
  - countercyclical capital buffers and provisions;
  - sectoral tools;
  - liquidity tools.
- Calibration and judgment:
  - Static/rules-based calibration reduces political obstacles but may be inefficiently tight at all times.
  - “Guided discretion” (key indicators + judgment) can balance flexibility and credibility.
  - Access to multiple tools improves trade-offs; interlocking use reduces distortions and circumvention incentives.
- Communication:
  - Use of clear communication and “presumptive indicators” (thresholds) can shape expectations and reduce need for stronger action.
- Stress/trade-offs:
  - In stressed conditions, policymakers may need to relax constraints to preserve credit provision while preserving resilience; tool-specific relaxations described (liquidity constraints, sectoral constraints confined to new lending, dynamic provisioning).

### Structural risks from interconnectedness and related tools
- Tools to contain structural interconnectedness risks:
  - capital surcharges for global and domestic systemically important institutions (G-SIFIs, D-SIBs);
  - increased sectoral capital requirements for exposures within financial system;
  - NFSR (in Basel III) as international benchmark for quantity-based tools;
  - quantitative limits on exposure size relative to capital (extend large exposure regimes);
  - liquidity instruments to reduce domestic or cross-border exposures among institutions;
  - market infrastructure changes (central counterparties) reduce interconnectedness but concentrate risk requiring prudent design and supervision;
  - mandated transparency over exposures to mitigate contagion from information gaps.
- Monitoring and boundary issues:
  - activity can migrate outside macroprudential reach; extension of the perimeter should be guided by economic function rather than legal form and be proportionate to risks.
  - recommended extensions:
    - equivalent prudential intervention to “bank-like” intermediaries dependent on short-term debt funding;
    - regulation of providers of leverage (broker dealers);
    - regulation of credit products (securitization) to ensure transparency and “skin in the game”;
    - regulation of haircuts in securities lending/repo markets and margin requirements in derivatives to avoid margin spirals and procyclicality.

### Data and information gaps: magnitude and priorities
- Data gaps hinder early detection, tool design/calibration, and perimeter policing.
- Household and corporate data:
  - household data scarce; greater granularity needed (e.g., regional real estate prices);
  - about 64 countries reporting real estate prices to the BIS;
  - credit registers required to capture pre-existing senior loans and compute overall ratios;
  - loan-level data for computing leverage indicators often unavailable.
- Structural/interconnectedness gaps:
  - missing domestic and cross-border exposures between financial institutions;
  - lack of detailed information on counterparties and maturities in funding markets;
  - OTC derivatives exposure information often missing.
- Regulatory boundary policing gaps:
  - lack of information on “Other financial corporations” (OFCs); SRFs reported only by 30 countries.
  - limited information on money market mutual funds’ portfolios and maturities.
- Closing gaps requires:
  - new data and improvements in granularity, frequency, and timeliness;
  - ensuring international homogeneity and comparability and leveraging official databases (IMF, BIS);
  - considering collection costs and pursuing targeted national and international data improvements;
  - use of IMF/FSB/G20 Data Gap initiative and SDDS Plus.

### Institutional arrangements, powers, objectives, and accountability
- Types of powers (paragraphs 73–76):
  - “Hard” powers: direct control over calibration of specific tools — useful for time-dimension rapid-risk tools; avoid delay; provide a credible “stick.”
  - “Semi-hard” powers: formal recommendations with ‘comply or explain’ — useful for structural components; increases transparency and accountability.
  - “Soft” powers: opinions or non-binding recommendations — useful to urge legislative or government action but alone insufficient.
- Information collection powers:
  - need to complement tool powers; ability to collect information beyond the regulatory perimeter is important to avoid duplication and close gaps (Office for Financial Research cited as example).
- Objectives and accountability (78–79):
  - Well-defined objective required to guide and constrain powers; objective can specify system resilience, contain risks from unsustainable credit/leverage/asset price increases, and contain structural risks from inter-linkages.
  - Secondary objectives may include maintaining financial system contribution to long-run growth or protecting depositors.
  - Accountability tools: publication of policy strategy, record of meetings, periodic reports assessing risks and actions.
- Assignment of mandate (80–86):
  - Mandate should be assigned to an entity (person, body, or committee) to strengthen willingness to act.
  - Central bank role desirable due to expertise and insulation from political interference.
  - Three prevalent models:
    - Model 1: mandate to central bank Board (e.g., Czech Republic).
    - Model 2: dedicated committee within central bank (e.g., U.K.).
    - Model 3: committee outside central bank with central bank participation (e.g., Australia, France, U.S.).
  - Choice influenced by traditions, political economy, and legal constraints; risks of dominant Ministry of Finance role noted and mitigants suggested (central bank chair, veto, strong voice).
- Governance and voting:
  - Consensus desirable; unanimity risky due to veto; simple or qualified majority may balance timeliness and inclusion.

### Cross-border, multilateral, and home-host coordination issues
- Multilateral perspective needed (paragraphs 88–100) because:
  - Lack of action in one country can impose negative externalities on others.
  - National time-dimension policies can lead to cross-border leakage via lending, branches, rebooking (empirical evidence cited).
  - Strengthening resilience in one country can cause activity migration to less regulated jurisdictions.
  - Home-host conflicts arise when affiliates operate across borders producing adverse spillovers.
- Reciprocity principle and CCB framework:
  - Under BCBS proposal each jurisdiction determines the CCB for exposures to counterparties in its country.
  - Home supervisor ensures CCB for internationally active banks is calculated on a consolidated basis by geographic location of exposures.
  - The CCB for internationally active banks will be a weighted average of CCBs applied in jurisdictions to which the bank has exposures.
  - Home supervisor cannot impose a buffer requirement below the host supervisor’s requirement.
  - Home supervisor can set a higher buffer for foreign exposures, but mandatory reciprocity does not apply to the amount above 2.5 percent; reciprocity for add-on buffers higher than 2.5 percent is voluntary.
- Home-host issues:
  - Home-country macroprudential actions (strict liquidity requirements, loan-to-deposit ratios) can cause deleveraging in host countries.
  - Host-country macroprudential actions can impose costs/loss of banking group efficiency (e.g., ring-fencing capital and liquidity).
- Multilateral/regional/bilateral solutions:
  - Multilateral approaches based on international agreements/standards (Basel) important but slow; surveillance needed to respond faster.
  - Regional coordination essential in integrated regional systems, single markets, currency unions (ESRB, Nordic-Baltic Macroprudential Forum examples).
  - Bilateral cooperation and supervisory colleges facilitate home-host coordination and ex ante agreed cooperation in resolution.

### Regulatory perimeter and shadow banking responses (selected country examples)
- Perimeter expansions and regulatory changes cited:
  - Croatia: 2007 credit growth cap closed line-of-credit loophole and addressed leasing funding by capturing leasing company funding within the credit limit.
  - Korea: LTV regulation perimeter expanded to cover non-banks within months of 2009 bank regulation.
  - New Zealand: Prudential regulation of non-bank deposit-taking finance companies transferred to Reserve Bank; 2010 regime covered capital, liquidity, related party exposures, credit ratings, governance and risk management.
  - United States: FSOC empowered to designate non-bank financial companies as systemically important (subjecting them to Fed supervision); Dodd-Frank “skin-in-the-game” credit risk retention requirement; longstanding U.S. experience with regulation of margin lending.
- Global interconnectedness and data needs:
  - External assets and liabilities of nations increased over six-fold as a share of GDP since financial globalization.
  - Some twelve G-SIFIs derive more than half of their revenues from outside their home country; three G-SIFIs exceed 75 percent.
  - Closer analysis of G-SIFI geographic footprints is critical but hampered by data gaps.

### Role of the Fund
- The Fund’s comparative advantages:
  - Mandate to promote effective operation of the international monetary system; near-universal membership; breadth of macroeconomic and financial stability expertise; focus on domestic policy mix and cross-country coordination.
- Ways the Fund can help:
  - Step-up analysis of macro-financial risks via surveillance, Article IV consultations, mandatory financial stability assessments, and FSAPs.
  - Support Integrated Surveillance Decision (ISD) reporting on domestic stability and spillovers.
  - Assist in institutional underpinnings through surveillance, FSAP, and technical assistance to build governance and operational capacity.
  - Help close data gaps via the IMF/FSB/G-20 Data Gap initiative, SDDS Plus, mapping global flows, capturing shadow banking data, and G-SIFI data improvements.
  - Serve as global macroprudential facilitator: global risk advisor, research on macro-financial linkages and tool transmission, promote capacity building, regional cooperation, and a macroprudential instruments database.

### Key operational and policy challenges — “road ahead”
- Constraints and challenges:
  - Detecting systemic risk remains difficult despite quantitative advances.
  - Calibrating tools is challenging given uncertainty over transmission strength.
  - Achieving strong governance is difficult when success is not directly observable and costs are immediate.
  - Biases toward inaction from lobbying, political interference, and coordination frictions.
  - Circumvention via boundary problems and cross-border arbitrage requires adaptive perimeter policies and international coordination.
  - Closing information and regulatory gaps often requires legislative change and resources.
- Research priorities:
  - Map risk indicators to policy responses.
  - Estimate transmission strength of specific tools.
  - Assess effects of combining tools on crisis probability and depth.
- Policymaker cautions (selected):
  - Do not be lulled by apparent macroeconomic stability; financial imbalances can grow beneath the surface without inflationary signals.
  - Do not rely on any single quantitative approach; combine methods with qualitative information and market intelligence.
  - Do not over-rely on a single tool; interlocking tools across time and structural dimensions are required.
  - Do not overburden macroprudential policy; define objectives clearly and complement with strong monetary, fiscal and structural policies.

*Source: IMF staff text from content unit _061013b.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Overview and purpose
- The crisis has underscored the costs of systemic instability at both the national and the global levels and highlighted the need for dedicated macroprudential policies to achieve financial stability.
- This paper provides a framework to inform the IMF’s country-specific advice on macroprudential policy, recognizing that developing macroprudential policy is a work in progress and addressing key issues to help ensure its effectiveness.
- June 10, 2013

### Major findings and core messages
- The goals and scope of macroprudential policy need to be defined clearly.
  - Macroprudential policy should aim to contain systemic vulnerabilities, and not be overburdened with objectives that it is unsuited to achieve.
- Macroprudential policy must be supported by strong supervision and enforcement and complemented by appropriate monetary, fiscal and other financial sector policies.
  - In turn, effective macroprudential policy can help these other policies achieve their goals.
- Effective macroprudential policy requires the ability to:
  - assess systemic risk;
  - assemble and deploy the toolkit;
  - monitor and close regulatory gaps;
  - close data and information gaps.
  - While principles and practice can be established in each of these areas, much further work remains.
- Strong institutional and governance frameworks are essential for the effective conduct of macroprudential policy.
  - They can benefit from an appropriate strength of powers and clear accountability.
  - The central bank needs to play an important role, even if precise arrangements are driven by political economy and traditions.
- Cross-border implications of macroprudential policies call for international coordination.
  - Multilateral issues can arise from a lack of national action, differences in the phase of financial cycles, and conflicts between home and host authorities of cross-border financial institutions.
  - A range of mechanisms are available to address these problems, but coordination will remain challenging in practice.

### Definition, rationale, and objectives
- Macroprudential policy has been defined as the use of primarily prudential tools to limit systemic risk.
- Systemic risk is characterized as the risk of disruptions to the provision of financial services caused by an impairment of all or parts of the financial system, with potential serious negative consequences for the real economy.
- The rationale for macroprudential intervention rests on three sets of systemic externalities:
  - (i) the tendency of the financial system to amplify adverse aggregate shocks;
  - (ii) macro-financial feedback mechanisms that result in an overexposure to such adverse aggregate shocks;
  - (iii) linkages within the financial system that increase the vulnerability of the system to idiosyncratic or aggregate shocks.
- These externalities imply three tasks for macroprudential policy:
  - increase resilience of the financial system to aggregate systemic shocks by building buffers;
  - in the time dimension, contain the build-up of systemic vulnerabilities over time and reduce procyclical feedback between asset prices and credit;
  - in the structural (cross-sectional) dimension, control the build-up of vulnerabilities arising through interlinkages and large/critical institutions.

### Tools and scope
- Macroprudential policy uses primarily prudential tools, including:
  - countercyclical capital buffers and provisions;
  - sectoral capital requirements;
  - measures to contain liquidity and foreign exchange (FX) mismatches;
  - caps on loan-to-value (LTV) and debt-to-income (DTI) ratios.
- Macroprudential policy can also:
  - affect the design of products offered to borrowers in retail markets;
  - affect the functioning and institutional underpinnings of wholesale markets;
  - use tools traditionally associated with other policy fields (e.g., monetary: reserve requirements; fiscal: levies on wholesale funding; competition policy: takeover policies).

### Relationship with other policies
- Macroprudential policy is needed to achieve system-wide stability and complements—but is distinct from—microprudential policies.
- Financial stability need not emerge as a natural by-product of an appropriate macroeconomic policy mix; dedicated macroprudential policies are required.
- Interactions with other policy areas are central: monetary policy, fiscal and structural policies, competition policies, microprudential policies, and crisis management and resolution policies (detailed discussion appears in the paper’s sections referenced).

### Operationalization and remaining work
- The paper outlines five steps to operationalize macroprudential policy (detailed in Section IV of the paper).
- Key operational requirements include:
  - assessing systemic risk (time and structural dimensions);
  - selecting and assembling the macroprudential toolkit;
  - calibrating macroprudential tools;
  - monitoring and closing regulatory gaps;
  - closing data and information gaps.
- While some principles and practices are established, much further work is needed to assess systemic risk, calibrate tools, and close data and regulatory gaps.

### Institutional arrangements and governance
- Effective macroprudential policy depends on:
  - appropriate macroprudential powers;
  - clear objectives and accountability;
  - assignment of the mandate (with an important role for the central bank, subject to national political economy and traditions).
- Institutional frameworks should balance strength of powers with clear accountability to ensure legitimacy and effectiveness.

### Multilateral and cross-border considerations
- Cross-border implications necessitate international coordination due to:
  - potential lack of national action;
  - differences in phases of financial cycles across countries;
  - conflicts between home and host authorities of cross-border financial institutions.
- The paper discusses multilateral, regional and bilateral solutions and recognizes coordination will be challenging.

### Role of the Fund
- The Fund can play a key role through bilateral and multilateral surveillance and in collaboration with standard setters and country authorities to help ensure the effective use of macroprudential policy for domestic and global stability.
- The paper is intended to guide the Fund’s country-specific advice and to contribute to understanding interactions between macroprudential, macroeconomic and other financial and regulatory policies, including institutional arrangements for governance and accountability.

*Prepared under the guidance of Jan Brockmeijer; led by Erlend Nier and Jacek Osiński (MCM) with Jessica Allison, Chikako Baba, Johannes Ehrentraud, Yitae Kim, Heedon Kang, Ivo Krznar, Srobona Mitra and Tomas Mondino (all MCM), in collaboration with Ruud De Mooij and Michael Keen (FAD), Lev Ratnovski (RES), Shuntaro Hara, Manju Ismael, Vanessa Le Lesle and Alison Stuart (SPR), and Andrew Kitili and Elena Loukoianova (STA).*

### 15.      An important distinction is between macroprudential measures and capital flow

### 15.      An important distinction is between macroprudential measures and capital flow management measures (CFMs)

### Distinction of objectives and scope
- CFMs are designed to limit capital flows; macroprudential measures are prudential tools designed to limit systemic vulnerabilities (IMF (2012b)).
- Macroprudential measures can address vulnerabilities associated with capital inflows and exposure of the financial system to exchange rate shocks, but they do not seek to affect the strength of capital flows or the exchange rate per se.5
- There can be overlap: measures to contain systemic risks from capital inflows can be both macroprudential measures and CFMs.5

### Limits of macroprudential policy: asset prices, interest rates, exchange rates
- Macroprudential policy is not well-suited to control asset prices (including prices of securities—stocks and bonds), or interest and exchange rates.
- These prices are driven by a range of fundamental and speculative factors—including other policies—and affecting them should not be seen as a primary aim of macroprudential policies.

### Focus on systemic vulnerability and resilience
- Macroprudential policy seeks to contain the vulnerability of the system to asset price reversals (e.g., leveraged exposures to asset prices).6
- Where such vulnerabilities exist, macroprudential policy should act to increase resilience to asset price shocks.7
- In the absence of systemic vulnerabilities, macroprudential action may not be warranted; e.g., a ‘search for yield’ that increases investment in risky assets is a macroprudential concern only when it leads to build-up of systemic vulnerability such as unsustainable leverage.8
- Macroprudential policy should not be overburdened with broader objectives (e.g., management of the level and composition of aggregate demand). It needs well-defined objectives and should not be co-opted for other purposes.

### Relationship with monetary policy
- Strong complementarities and interactions between monetary and macroprudential policies reinforce the need for a strong macroprudential framework; central banks have strong interest in effective macroprudential policy and often push for macroprudential frameworks.
- Interactions call for coordination while preserving monetary policy independence and credibility.9
- Even when monetary policy is set for price stability, the monetary stance can have undesirable side effects for financial stability:
  - Low policy rates consistent with low inflation may still contribute to excessive credit growth and asset bubbles.
  - In small open economies, interest rate increases to address inflation can draw in capital flows that raise financial risks; interest cuts to counter subdued domestic demand may lead to large capital outflows that jeopardize domestic financial stability.
- A strong macroprudential framework can reduce conflicts and create more room for monetary policy to pursue price stability.10
- Because macroprudential policy cannot be fully effective, monetary policy conduct also needs to account for financial stability considerations.11
- Reducing systemic risks and creating buffers via macroprudential policy helps monetary policy in adverse financial shocks (e.g., reducing risk of hitting the zero lower bound or of strong outflows in small open economies).

### Fiscal and structural policies
- Appropriate fiscal and structural policies are critical to reduce the likelihood of macroeconomic shocks that drive systemic risk.
  - Where consumption booms are fed by capital inflows with persistent current account deficits, macroprudential policies alone are unlikely to be effective; prudent fiscal and structural policies are needed.
  - Prudent fiscal policies are essential to maintain sovereign debt safety and avoid adverse feedback loops between sovereign risk and the financial system.
- Macroprudential authorities can analyze underlying macroeconomic risks, draw out systemic implications, and flag concerns to fiscal/structural policymakers.

### Tax treatment, distortions, and Pigovian levies
- Existing tax policies can create biases that contribute to systemic risk. Macroprudential authorities have an interest in correcting such biases.
  - Corporate tax systems create a ‘debt bias’ because interest is tax-deductible while returns to equity are not.12
  - Empirical estimates: the average tax response by banks is about as large as for non-financial firms; the long-run tax effect on the leverage ratio is estimated between 0.20 and 0.27. Eliminating the bias from a 25 percent corporate tax rate might increase banks‘ capital in the long run by, on average, 3.75 percent of their assets: an increase of more than 30 percent over their current levels.13
  - Tax treatment of housing (light or no tax on imputed rent, generous mortgage interest relief) can encourage borrowing against housing and increase household vulnerability to shocks.
- Pigovian taxes and levies can address systemic externalities. The “Financial Stability Contribution” (FSC) proposed by the Fund is a key example.14
  - An FSC can discourage leverage and wholesale funding and be linked to financing a credible resolution mechanism; it could be levied at a flat rate or varied to reflect institutions’ contributions to systemic risk and overall risk over time.15
  - Around a dozen European countries—including France, Germany and the United Kingdom (U.K.)—and Korea have adopted bank taxes resembling an FSC.
- Taxes can affect asset prices (e.g., removing stamp duties or extending mortgage interest relief can bolster house prices during busts; stamp duties have been used to lean against house price appreciation in Singapore and Hong Kong). Such measures can introduce distortions and may increase price volatility; cyclical tax changes face implementation lags.

### Structural measures affecting housing supply
- Structural measures (land use policies, housing market functioning) can affect house price dynamics and reduce systemic risks; macroprudential authorities will often seek to influence their design. (IMF, 2011e)

### Competition policy interactions
- Competitive processes in the financial sector can incentivize excessive risk-taking, creating tensions between competition and financial stability.16
  - Relaxation of licensing and branching restrictions can erode lending standards and increase risk taking (e.g., Keeley, 1990).
  - Foreign entry, increased access to wholesale funding, and greater availability of “hard” borrower information can spur aggressive competition, reduced margins, and stronger incentives for risk taking.
  - Proliferation of “non-bank” credit providers can increase competitive pressures that pose risks to financial stability (e.g., credit-card booms in Korea and Mexico).17
- From a structural perspective, financial stability concerns often reinforce traditional competition objectives:
  - Mergers can create “too big to fail” institutions; macroprudential authorities have an interest in controlling mergers and takeovers.
  - Large and complex institutions may be “too difficult to resolve,” motivating preventive powers to break up institutions or force organizational changes to increase resolvability.18
- Policy responses:
  - Assigning traditional competition powers (licensing, take-over control, break-up powers) to prudential authorities is one approach.
  - Ensuring strong coordination/consultation between prudential and competition authorities and introducing financial stability as a secondary objective for competition authorities is another.
  - Where micro- and macroprudential authorities are distinct, macroprudential bodies should be consulted on policy design and application.

### Microprudential supervision and tensions
- Microprudential supervision should work “hand in glove” with macroprudential policy; recent revisions to the Basel Core Principles emphasize a macroprudential perspective in supervision.21
  - Supervisory agencies should ensure safety and soundness of individual institutions and contribute to system-wide stability.
  - Shared information, joint risk analysis, and strong dialogue reinforce complementarities; strong supervision is essential for macroprudential risk assessment and enforcement.
- Tensions may arise, especially in “bad times.”22
  - In “good times,” supervisors may agree on building buffers; in “bad times,” macroprudential perspectives may call for relaxation of requirements to preserve credit supply, while microprudential perspectives may seek to retain or tighten requirements to protect depositors.
  - Ways to address conflicts:
    - Establish sufficient prudential buffers in “good times” so macroprudential authorities can reduce buffers without compromising microprudential objectives.
    - Encourage increases in capital levels (privately or publicly provided) rather than deleveraging in bad times to align microprudential and macroprudential objectives.
    - Create institutional mechanisms (e.g., a macroprudential committee) that include supervisory participation to bring supervisory perspectives into macroprudential decision-making (Nier and others, 2011).

*Source: IMF staff text from the provided content unit.*

### 33.      Crisis management and resolution policies are complementary to macroprudential

### 33.      Crisis management and resolution policies are complementary to macroprudential policy

### Crisis management and resolution — interplay with macroprudential policy
- Crisis management may require:
  - monetary easing and emergency liquidity assistance by the central bank;
  - effective resolution of failing banks by dedicated resolution or deposit insurance agencies;
  - potentially public guarantees and capital support provided by the fiscal authorities.
- Proper design of resolution regimes can:
  - strengthen market discipline and reduce incentives to take excessive risks, mitigating the need for macroprudential intervention;
  - where resolution difficulties remain, require more forceful macroprudential action that can increase incentives for circumvention.
- In a systemic crisis:
  - macroprudential authorities continue to advise and may use instruments to contain amplification of risks;
  - fiscal authorities are likely to take the lead in coordinating the overall policy response because taxpayer money would need to be used.

### Operationalizing macroprudential policy — overview and key tasks
- Operationalization requires ongoing analytical and policy development and hinges on assuring access to appropriate data and information.
- Five key steps (tasks) to operationalize macroprudential policy:
  - Identify & Close Data Gaps
  - Develop Capacity to Assess Systemic Risk
  - Select & Assemble Macroprudential Toolkit
  - Calibrate Tools, Communicate with the Public and Markets
  - Monitor & Close Regulatory Gaps
- Core operational requirements (bulleted):
  - develop capacity to analyze systemic risk, including build-up through time and interconnectedness;
  - select and assemble a set of macroprudential instruments to address systemic risk;
  - calibrate tools taking account of their likely benefits and costs and clearly communicate policy judgments;
  - continuously monitor regulatory gaps and take timely action to close them;
  - fill data gaps that impede analysis of macro-financial linkages, tool design/calibration, and detection of regulatory gaps.

### A. Assessing systemic risk — framework, indicators, and limitations
- Monitoring framework needs to consider:
  - (i) growth in total credit and macroeconomic drivers of imbalances;
  - (ii) financial linkages between financial and domestic real sectors (household and corporate), and with the rest of the world;
  - (iii) structure of the financial system and linkages within and across key classes of intermediaries and market infrastructures.
- Key empirical finding:
  - increases in the ratio of private sector credit to GDP (growth in credit relative to GDP or deviation from long-run trend) is the best single indicator of an increase in the probability of a crisis over a horizon of 1 to 3 years.
- Complementary indicators to combine with credit growth:
  - prices of assets used as collateral for secured lending;
  - leverage taken by borrowers in asset markets, average and on new loans;
  - changes in lending standards (e.g., decreases in lending margins, increases in household and corporate leverage);
  - debt-service to income ratios for household and corporate sectors;
  - increases in exposure to interest rate and currency risks;
  - external imbalances (current account deficits and real exchange rate appreciation).
- Structural analysis should consider:
  - capacity of financial system to absorb default risk and valuation changes (via leverage ratios, profitability, stress tests);
  - extent of reliance on wholesale funding (ratio of non-core to core funding, ratio of credit to deposits).
- Interconnections:
  - new products and non-bank intermediaries can change risk concentrations and create “too important to fail” institutions or funding fragilities (e.g., money market mutual funds).
  - connections can act as shock absorbers or transmitters; increased connectivity is not always higher systemic risk.
  - techniques such as network analysis and contingent claims analysis can help but are often hampered by data gaps.
- Decision-making:
  - combine a range of indicators and methods with qualitative judgment;
  - slow-moving indicators detect build-up; high-frequency and market-based indicators better predict imminent materialization of systemic risk and can give months’ warning.
- Key gaps and challenges:
  - Early warning: forward-looking properties of systemic risk measures are generally weak, though combinations (credit-to-GDP and asset valuation measures) may be promising.
  - Thresholds: policymakers need clear, reliable signals indicating when to act; empirical evidence suggests credit and property price growth beyond certain levels raises crisis probability over 2 to 3 years.
  - System behavior: limited capacity to model endogenous responses, feedback and multi-round effects, and nonlinear risk correlations during distress.

### B. Selecting and assembling the macroprudential toolkit — categories and trade-offs
- No single “best practice” toolset fits all countries; assemble a range of tools ex ante and consider interlocking use.
- Three sets of tools in the time dimension (complementary):
  - countercyclical capital buffers and provisions — increase resilience to shocks;
  - sectoral tools — contain build-up of risks in particular sectors;
  - liquidity tools — contain funding risks.
- Countercyclical capital buffer (CCB):
  - will be available in many countries through implementation of Basel III;
  - Basel CCB requirement phased in gradually from 2016 to 2019; countries may consider accelerated phase-in;
  - early adopters include China, New Zealand, Switzerland and the U.K.;
  - advantage: can be activated to increase resilience to a whole range of shocks; release expected to avoid credit crunch effects by reducing pressure on banks to deleverage;
  - limitation: blunt tool, applied uniformly to all exposures, slow to react to segment-specific build-ups; activation may have limited impact if banks hold voluntary buffers or can rapidly generate capital.
  - simulation exercises suggest activation of CCBs would have been triggered by increases in credit to GDP well ahead of crises in Ireland and Spain, providing additional resilience and complementing dynamic provisions in Spain.
- Sectoral capital requirements:
  - increasing risk weights for lending to particular segments (mortgages, unsecured consumer credit, corporate lending, commercial property) can complement CCB;
  - targeted increases expected to raise loan interest rates for targeted sector and increase lenders’ resilience.
- LTV and DTI ratios (focus on residential housing markets):
  - LTV: cap on mortgage loan relative to property value, imposing minimum down payment.
  - DTI: restricts mortgage loan size to a fixed multiple of household income.
  - Evidence: these tools can reduce feedback between credit and prices in upswing, improve resilience to shocks, reduce default rates and boost recovery values.
  - Trade-offs: more intrusive; calibration can soften impact (e.g., exemptions for first-time buyers as in Korea); LTV ratios can have a relatively strong effect on house prices and aggregate demand (IMF 2013b), justifying gradual tightening (as in Canada and the Netherlands).
- Liquidity tools:
  - aim to reduce vulnerabilities from system-wide increases in wholesale, short-term and FX funding;
  - can be quantity-based or price-based constraints to reduce reliance on vulnerable non-core funding;
  - Basel III includes LCR and NSFR, but additional tools can be adapted locally;
  - examples: Macroprudential Stability Levy (Korea), Core Funding Ratio (CFR) (New Zealand), marginal reserve requirements used in several emerging markets;
  - benefit: by constraining wholesale funding, liquidity tools can slow overall credit growth since core funding (retail deposits) grows slowly, complementing CCBs and sectoral tools.

*Source: IMF staff, "KEY ASPECTS OF MACROPRUDENTIAL POLICY" (excerpts).*

### 51.      A range of complementary tools can contain structural risks from interconnectedness

### 51.      A range of complementary tools can contain structural risks from interconnectedness

### Structural risks from interconnectedness and tools to address them
- Prudential tightening can improve resilience and resolvability of institutions whose failure poses systemic risks (capital surcharges for global and domestic systemically important institutions are the key example).
- Prudential tools can be used to discourage exposures to systemically important institutions or excessively large exposures within the financial system (Arregui, Scarlata, and others, 2013).
  - Increased sectoral capital requirements for exposures within the financial system or specific types of exposures that are growing rapidly (as proposed for the U.K. Financial Policy Committee (FPC)).
  - The NFSR that will be introduced as part of Basel III can serve as an international benchmark for quantity-based tools.
  - Quantitative limits on the size of exposures relative to capital, extending existing large exposure regimes to exposures within the financial system (discussed by the Basel Committee).
  - Liquidity instruments to reduce domestic or cross-border exposures among financial institutions (Shin, 2010a and 2010b).
- Market infrastructure changes (payment, settlement and clearing arrangements) can reduce build-up of credit exposures from transactions within the financial system.
  - Central counterparties for clearing of derivatives reduce interconnectedness but concentrate systemic risk and therefore need prudent design and close supervision.
- Mandated increased transparency over exposures can mitigate contagious effects strengthened by lack of information.

### Calibrating macroprudential tools: benefits, costs, transmission, and judgment
- Use of macroprudential tools must trade off benefits and costs, combining:
  - Analysis of changes in the sources and level of systemic risk;
  - Understanding of transmission of available macroprudential policy tools;
  - Assessment of costs and distortions from macroprudential action (CGFS, 2012; Arregui and others, 2013).
- Time dimension vs structural dimension:
  - Structural dimension often entails sustained initiatives imposing new constraints.
  - Time dimension involves dynamic changes—tightening then relaxing constraints as risks evolve.
- Transmission mechanism uncertainty:
  - Conceptual channels can be mapped, but the strength and precise quantitative impacts are difficult to measure.
  - Empirical literature documents transmission to resilience and to growth in credit and asset prices (Lim and others, 2011; Vandenbussche and others 2012; CGFS, 2012; IMF 2013b; Arregui and others, 2013).
  - Emerging literature assesses short-run costs of variation in macroprudential tools on output (CGFS, 2012; IMF, 2013b; Arregui and others, 2013).
  - Benefits for reducing probability and depth of future crises remain difficult to quantify (Annex IV).
- Calibration requires judgment:
  - Static or rules-based calibration reduces political obstacles but may need to be inefficiently tight at all times, causing distortions and incentives for circumvention (Goodhart, 2008).
  - "Guided discretion" based on key indicators complemented by judgment can balance flexibility and credibility (Swiss National Bank 2012; Bank of England (BoE), 2013; background paper).
  - Complement automatic stabilizers (e.g., dynamic provisions) with adjustable targeted tools.
- Access to multiple tools improves trade-offs:
  - Marginal benefit of tightening any one tool is likely decreasing; aggressive use creates distortions and incentives for circumvention (CGFS, 2012).
  - Interlocking use of complementary tools reduces costs and better tailors policy to prevailing risk profiles (example: targeted sectoral tightening vs broader tools for pervasive credit growth).
- Communication is essential:
  - Clear communication can foster understanding of benefits and steer market expectations, e.g., mapping “presumptive indicators” for tool use (Goodhart, 2011).
  - Using thresholds (two thresholds for credit growth—lower and higher) can influence expectations and mitigate need for stronger action (IMF, 2011b; Dell’ Ariccia and others, 2012; Arregui and others, 2013).
- Trade-offs in stressed conditions:
  - Policymakers may need to relax constraints that impede credit provision, avoid fire-sale dynamics, and prevent vicious feedbacks between economic and financial deterioration.
  - Relaxation must preserve confidence and maintain resilience to future shocks.
  - Tool-specific trade-offs:
    - Relaxing liquidity constraints can sustain credit and accommodate shorter funding maturities without necessarily entailing loss of confidence (IMF, 2013b).
    - Relaxation of sectoral constraints confined to new lending can balance resilience and credit provision.
    - Dynamic provisioning regimes act as automatic stabilizers since draw-down is built into design.
- Complementary policy actions improve trade-offs:
  - Robust resolution frameworks and disclosure of stress test results for individual banks can allow relaxation of system-wide capital buffers while maintaining confidence (Osiński and others, 2013).
  - Liquidity requirements can be more readily relaxed with a central bank commitment to emergency liquidity provision.

### Monitoring and closing regulatory gaps (boundary problems)
- Authorities must monitor migration of activity outside macroprudential reach and expand scope as necessary.
  - Extension should be guided by economic function rather than legal form and proportionate to risks to financial stability (FSB 2012).
- Boundary problems:
  - Effective regulation confined to certain institutions can push activity to less constrained intermediaries, market-based financing, or connected operations in less regulated sectors—this applies to all financial regulation.
- Macroprudential approach to boundary problems:
  - System perspective encompasses all individually systemic institutions and all collectively systemically important providers of financial services (IMF 2011a; Nier, 2011).
  - Extension of regulatory perimeter motivated by macroprudential concerns need not imply extension of the “safety net.”
- Recommended extensions of macroprudential tools:
  - Equivalent prudential intervention to “bank-like” intermediaries that do not take deposits but provide credit and depend on short-term debt funding (in line with FSB recommendations).
  - Regulation of providers of leverage in markets dependent on short-term or secured funding (e.g., broker dealers).
  - Regulation of credit products traded in financial markets (e.g., securitization) to create transparency and “skin in the game.”
  - Regulation of haircuts in securities lending and repo markets, and margin requirements in derivatives markets to avoid margin spirals that contribute to excess leverage and procyclicality (Geanakoplos, 2010; Longworth, 2010; Hanson and others, 2011; FSB 2012).
- Practical experience:
  - Growing country experience responding to arbitrage and increased non-bank credit provision when deploying macroprudential tools (Annex V highlights Croatia, Korea, New Zealand and the U.S.).

### Closing data and information gaps
- Data and information gaps hinder:
  - Early detection of systemic risk;
  - Design and enforcement of macroprudential instruments;
  - Policing of the regulatory perimeter.
- Household and corporate sector data gaps:
  - Household data scarce; greater granularity needed (e.g., regional real estate prices) to implement and enforce LTV and DTI ratios.
    - About 64 countries reporting real estate prices to the BIS.
  - Credit registers are required to provide information on pre-existing senior loans to compute overall ratios.
  - Granular data on cross-border credit flows to corporates needed to assess FX exposure mitigation measures.
  - Loan-level data for computing indicators of leverage and vulnerabilities across borrower and asset classes often not available (see Geanakoplos and Pedersen, 2011).
- Structural/interconnectedness data gaps:
  - Missing information on domestic and cross-border exposures between financial institutions, including potentially systemically important ones.
  - Detailed information on counterparties and maturities in funding markets often not collected.
  - OTC derivatives exposure information often missing, reducing ability to assess risk concentrations and design/enforce constraints.
- Regulatory boundary policing gaps:
  - Lack of information on “Other financial corporations” (OFCs); typically only statistical data available capturing basic indicators (e.g., total assets).
  - Money market mutual funds: little known about investment portfolios and maturities (Heath, 2013).
  - Data on balance sheets of OFCs available in standardized reporting forms (SRFs) but currently reported only by 30 countries.
- Closing gaps requires improvements in statistical and supervisory data:
  - New data and improvements in granularity, frequency, and timeliness of existing data.
  - Ensure homogeneity and comparability of data internationally and leverage existing official databases (IMF, BIS).
  - Consider costs of information collection; pursue well-targeted national and international data improvements.
  - IMF/FSB/G20 Data Gap initiative and SDDS Plus represent important advances (Annex VI).

### Institutional arrangements and macroprudential powers
- Strong institutional frameworks are essential to effective macroprudential policy:
  - Foster ability to act in face of evolving systemic threats;
  - Assure access to information and appropriate range and reach of instruments;
  - Establish strong accountability based on clear objectives;
  - Ensure strong communication to create public awareness and willingness to act;
  - Counter inaction biases arising from difficulty quantifying benefits, industry lobbying, political pressures, and inter-agency coordination needs.
- Macroprudential powers required where financial systems evolve dynamically:
  - Powers to obtain necessary information;
  - Powers to influence strength of regulatory constraints on the financial system;
  - Powers to designate individual institutions as systemically important;
  - Powers to initiate changes in the regulatory perimeter to expand reach of macroprudential policies to collectively important providers of credit and liquidity (IMF, 2011a).

*Source: _061013b - 51.      A range of complementary tools can contain structural risks from interconnectedness*

### 73.      The strength of such powers can vary and be

### _061013b - 73.      The strength of such powers can vary and be

### 73–76: Types of macroprudential powers and their use
- 73. The strength of such powers can vary and be:
  - “hard” (direct), enabling the policymaker to have direct control over the calibration of specific macroprudential tools,
  - “semi-hard,” enabling the policymaker to make formal recommendations, coupled with a ‘comply or explain’ mechanism, or
  - “soft,” enabling the policymaker to express an opinion, or a recommendation that is not subject to comply or explain.
- Each type of power can be useful and the effectiveness of the policy frameworks can benefit from a combination of these powers.
- 74. Hard powers:
  - Usefully assigned over the calibration of a well-defined set of macroprudential tools.
  - Avoid delay and frictions from requiring cooperation by other policymakers.
  - Often considered for tools that control the rapid build-up of risks in the time dimension.
  - Increase policy effectiveness through credible communication with financial markets.
  - Provide the macroprudential policymaker with a “stick” to credibly threaten use of the tool.
- 75. Semi-hard powers (recommendations with ‘comply or explain’):
  - Broadly influence the whole range of regulatory actions by other supervisory and regulatory agencies.
  - Useful for addressing structural components of systemic risk where interventions are less frequent or require supervisory judgment.
  - The ‘comply or explain’ mechanism increases chance of compliance and ensures transparency and public accountability.
  - Helps supervisory agencies overcome industry opposition or political pressure by pointing to the macroprudential recommendation.
- 76. Soft powers:
  - Useful to extend influence beyond existing prudential tools, e.g., urging legislature to establish new tools or change legal frameworks.
  - Appropriate for urging government action to contain broader macroeconomic imbalances that feed systemic risk.
  - Soft powers alone are unlikely to be sufficient to ensure overall policy framework effectiveness.

### 77: Information collection powers
- Information collection powers need to complement powers over policy tools to close information gaps.
- To avoid duplicative costs on the financial industry, the macroprudential authority should seek information available to other agencies and review legal impediments to information exchange.
- Because financial activity can migrate in response to regulation, the policymaker needs power to collect information beyond the regulatory perimeter.
- A broad back-up power to collect information directly from financial firms can be useful (example: Office for Financial Research in the United States).

### B. Objectives and Accountability (78–79)
- 78. Need for a well-defined objective to guide and constrain macroprudential powers:
  - Provides basis for holding the policymaker accountable.
  - Guards against abuse of macroprudential policy or its use to avoid difficult choices in fiscal and structural policy.
  - The objective can articulate scope in both time and structural dimensions, for instance specifying that the policymaker should:
    - (i) ensure the overall resilience of the system;
    - (ii) contain risks from unsustainable increases in credit, leverage and asset prices; and
    - (iii) contain structural risks from inter-linkages within the financial system.
  - Secondary objectives can be specified to ensure recognition of trade-offs, such as:
    - maintaining the contribution of the financial system to the long-run growth of the economy, or
    - protecting the interests of depositors.
- 79. Accountability framework elements:
  - Publication of a policy strategy: encourages development and publication of a strategy for deploying specific macroprudential tools over which the decision-maker has direct control.
  - Record of meetings: where decisions are made by committee, framework can specify publication of meeting records to establish transparency on issues discussed and votes cast.
  - Periodic reports: requirement to publish periodic reports including assessment of risks and policy actions taken.

### C. Assignment of the Mandate (80–86)
- 80. To strengthen ‘willingness to act,’ the macroprudential mandate should be assigned to someone, a body or a committee; lack of clear assignment leads to collective action problems and reduced accountability.
- 81. Desirability of a central bank role:
  - Central bank expertise in systemic risk identification and incentives to ensure effective pursuit of macroprudential policy.
  - Can help shield policymaking from political interference that slows deployment or biases use.
- 82. Three prevalent models for macroprudential policymaking:
  - Model 1: Mandate assigned to the central bank, with decisions made by its Board (example: Czech Republic).
  - Model 2: Mandate assigned to a dedicated committee within the central bank structure (example: U.K.).
  - Model 3: Mandate assigned to a committee outside the central bank, with central bank participation (examples: Australia, France, U.S.).
- 83. Choice of model influenced by traditions, political economy, perceived need for checks and balances, existing monetary and supervisory arrangements, and legal constraints.
- 84. Model 1: Natural where central bank concentrates regulatory and supervisory powers; coordination mechanisms (e.g., coordination committee chaired by central bank) can complement when agencies are outside the central bank.
- 85. Model 2: Counters dual-mandate risk by creating separate decision-making structures for monetary and macroprudential policy while allowing participation by supervisory agencies and external experts.
- 86. Model 3: Accommodates a strong Ministry of Finance role; MoF participation useful when legislative changes are needed, but dominant MoF role risks delaying action and compromising independence. Risks can be countered by:
  - assigning central bank chairmanship (example: Australia),
  - giving central bank a strong voice (example: Mexico),
  - granting central bank a veto (example: Germany),
  - or establishing only soft powers for the decision-making committee.

### Governance and voting (87)
- 87. ‘Willingness to act’ is influenced by committee governance, including voting arrangements:
  - Consensus is desirable, but unanimity gives each member a veto and can paralyze policy.
  - Simple or qualified majority arrangements can balance avoiding delay with ensuring consideration of trade-offs and diverse perspectives.

### Multilateral Issues — Need for a multilateral perspective (88–100)
- 88. In a financially integrated world, effective macroprudential policy requires a multilateral perspective due to collective action problems at the international level and potential suboptimal global outcomes when cycles are unsynchronized or intermediaries evade national policies.
- 89. Financial integration poses specific challenges:
  - Lack of forceful macroprudential action in one country can impose negative externalities on others.
  - National policies to contain domestic credit build-up can increase provision of cross-border credit.
  - Strengthening resilience of systemic institutions in one country can cause activity migration to other countries.
  - Affiliates in multiple jurisdictions complicate systemic risk assessment and can generate home-host conflicts.

A. Lack of Action (90–92)
- 90. Lack of preventive macroprudential action in one country can increase crisis likelihood and impose substantial costs on other countries due to trade and financial spillovers.
- 91. Strong national institutional frameworks are essential to address biases toward inaction; these biases can be countered by appropriate powers, strong accountability, and clear mandate assignment.
- 92. National frameworks can be buttressed by international guidance and surveillance:
  - Basel Committee guidance to monitor credit-to-GDP increases and prepare to increase countercyclical capital buffers.
  - The Fund’s surveillance, FSAPs, and technical assistance can help assess systemic risks and advise on preventive action, strengthening national authorities’ resolve against opposition.

B. Need for Coordination — Action in the Time Dimension (93–96)
- 93. National time-dimension policies to contain rapid domestic credit build-up can lead to increased cross-border credit provision via cross-border lending, foreign branches, and “rebooking” of loans; such “leakage” effects are empirically documented (Aiyar and others, 2012) and complicated pre-crisis macroprudential policies (examples: Bulgaria and Croatia).
- 94. Addressing cross-border arbitrage calls for “reciprocity” in macroprudential action so the same constraint applies to all relevant credit exposures to borrowers in a given country, whether provided by domestic or foreign entities; reciprocity is enshrined in Basel III on the CCB (countercyclical capital buffer).
- 95. Further work may be necessary to expand reciprocity scope:
  - Countries may wish to impose targeted sectoral measures (e.g., increases in capital requirements/risk weights for mortgages or corporate credit), but there is currently no international agreement calling for reciprocity on sectoral measures or securities market risks.
  - Strength of CCB reciprocity implementation remains untested.
- 96. In absence of reciprocity, countries may resort to unilateral capital controls, which have distortions; increased cross-border banking flow risk without reciprocity creates incentives for home authorities to reciprocate macroprudential action. International agreements usefully supplemented by bilateral and regional arrangements to ensure reciprocity across needed tools.

C. Need for Coordination — Action in the Structural Dimension (97–99)
- 97. Measures to strengthen resilience of systemic institutions in one country can prompt activity migration to other countries, producing a race to the bottom and concentration of risky activities in less regulated jurisdictions.
- 98. International agreements and guidance can address this; advances include FSB determination of capital surcharges for G-SIFIs and Basel Committee guidance for capital surcharges for D-SIBs (domestic systemically important banks).
- 99. Guidance leaves room for national discretion; surveillance complements guidance by helping authorities assess risks, need for mitigation, and internalize cross-border failure costs when institutions have cross-border subsidiaries and branches.

D. Need for Coordination — Home-Host Issues (100)
- 100. Multiple-jurisdiction affiliates can lead to home-host conflicts (FSB, IMF, and WB, 2011):
  - Home-country macroprudential actions (e.g., strict liquidity requirements or loan-to-deposit ratios) can cause undesirable deleveraging in host countries.
  - Lack of home authority action can lead to spillovers when affiliates are systemic in host country but not recognized as such by home supervisors.
  - Host-country macroprudential actions to constrain risk of foreign branches/subsidiaries can impose costs and loss of banking group efficiency, for example when capital and liquidity must be held in and “ring-fenced” by the host country.

*Italic: Source: _061013b - 73.      The strength of such powers can vary and be*

### 101.      Where financial institutions operate across multiple borders this complicates the

### 061013b - 101.      Where financial institutions operate across multiple borders this complicates the

### Cross-border complications and supervisory implications (paragraphs 101–102)
- 101: Cross-border operations of financial institutions complicate the assessment of systemic risk for home, host, and global authorities.
  - In countries with a high share of foreign banks and without information on parent institutions and their exposures, assessing domestic systemic risk is difficult.
  - Foreign branches can act as “shadow banks” for the host supervisor.
- 102: These issues require bilateral and multilateral coordination and consultation.
  - Supervisory colleges can facilitate information exchange among regulatory authorities and foster recognition and understanding of home-host interdependencies.
  - A present impediment is that national authorities often lack incentives or even a legal mandate to take full account of the effects of their actions on financial stability in other countries.
  - Ex ante agreed cooperation in the application of national resolution powers is cited as a key mechanism to reduce systemic spillovers (example: recent agreement between the FDIC and the BoE).

### Multilateral, regional and bilateral solutions (paragraph 103)
- 103: The way forward may combine multilateral, regional and bilateral approaches.
  - Multilateral approaches:
    - Can be based on international agreements or standards, such as the Basel framework.
    - Development of international standards is a slow process and cannot fully account for local conditions; needs to be supplemented by surveillance to respond faster to evolving systemic risk.
  - Regional coordination:
    - Essential for countries in highly integrated regional financial systems, single markets, or currency unions.
    - Requires dedicated institutional mechanisms to deal with cross-border challenges (examples cited: the ESRB and the Nordic-Baltic Macroprudential Forum; ad-hoc structures like the “Vienna initiative”).
    - Note: In currency unions, macroprudential policy should be differentiated across countries belonging to the union; this requires strong mechanisms for regional coordination to avoid undermining effectiveness via cross-border arbitrage.
  - Bilateral approaches:
    - Require strengthening home-host cooperation in the macroprudential field.
    - Cooperation can range from supervisory colleges for individual institutions to bilateral agreements coordinating macroprudential measures between countries.

### Challenges and the road ahead (paragraphs 104–107)
- 104: The paper charts progress in establishing macroprudential policy frameworks using country experiences and analytical advances.
- 105: Important challenges and limitations of macroprudential policy include:
  - Detecting systemic risk will remain inherently difficult despite quantitative advances.
  - Calibrating macroprudential tools is challenging given uncertainty over their transmission.
  - Achieving strong governance is difficult when success is not easily measurable but costs are immediate.
  - Biases in favor of inaction are compounded by financial lobbying, political interference and public opposition.
  - Communication challenges exist, though some elements (e.g., periodic reports) can be borrowed from monetary policy frameworks.
  - Macroprudential policies are prone to circumvention: at the national level (boundary problem) and via cross-border arbitrage (leakage problem).
  - Flexible use of tools is required to keep pace with financial sector developments, but this can conflict with political and legal traditions.
  - Closing information and regulatory gaps is necessary but challenging and will often require legislative change.
  - In a financially integrated world, multilateral coordination is desirable but hard when home and host incentives are not aligned.
- 106: As experience with macroprudential tools accumulates, further research can guide policy, including:
  - Mapping risk indicators to policy responses.
  - Estimating transmission strength of specific macroprudential tools.
  - Assessing effects of combining tools to reduce the probability and depth of crises.
- 107: Policymakers should avoid key pitfalls:
  - Do not be lulled by apparent macroeconomic stability; financial imbalances can grow beneath the surface without translating into inflationary pressures.
  - Do not rely on any one quantitative approach; limitations of stress testing and network analysis require combining methods and complementing with qualitative information, market intelligence, and analysis of real imbalances.
  - Do not over-rely on a single tool; effective mitigation requires interlocking tools in both time and structural dimensions (the countercyclical buffer will be established by way of implementing Basel III in many countries).
  - Do not overburden macroprudential policy; objectives need to be clearly defined to form the basis of a strong accountability framework.
  - Macroprudential policy must be complemented by strong macroeconomic policies (monetary, fiscal and structural) to address systemic risk driven by real imbalances.
  - Macroprudential policy should not be expected to prevent all future crises; policymakers must be prepared to manage crises when they occur.

### The role of the Fund (paragraphs 108–112)
- 108: The Fund is positioned to help members establish effective macroprudential policies owing to:
  - Its mandate to promote the effective operation of the international monetary system.
  - Near universal membership.
  - Breadth of expertise spanning macroeconomic and financial stability analysis.
  - Focus on members’ domestic policy mix and cross-country policy coordination.
  - Partnership potential with the FSB and country authorities to ensure national macroprudential policies contribute to domestic and global stability.
- 109: The Fund can help national authorities assess macro-financial risks and advise on appropriate policy tools using:
  - Stepped-up analysis of macro-financial risks.
  - Existing surveillance and technical assistance instruments, including Article IV consultations, mandatory financial stability assessments and the FSAP.
  - Surveillance under the Integrated Surveillance Decision (ISD) focusing on countries’ own stability and actual or potential spillovers on global stability.
  - Multilateral surveillance discussing actual or potential spillovers and alternative policy options to minimize adverse global impacts.
  - Goals: enhance complementarity between monetary, macroprudential and microprudential policies; identify tools to minimize negative side effects; consider cross-border effects of policies.
- 110: The Fund can help ensure appropriate institutional underpinnings for national macroprudential frameworks through financial sector surveillance, FSAP, and technical assistance to build strong institutional foundations, governance arrangements, and operational capacity within legal, political and resource constraints.
- 111: The Fund can help close data gaps impeding analysis of macro-financial linkages and interconnectedness via:
  - The IMF/FSB/G-20 Data Gap initiative, SDSS and SDDS Plus.
  - Mapping global flows of funds and better capturing data on shadow banking.
  - Progress on capturing data on G-SIFIs to enhance systemic risk analysis over time.
  - Encouraging staff to highlight data gaps in Article IV consultations.
- 112: The Fund can become a global macroprudential facilitator by:
  - Acting as a global risk advisor through risk assessment work and multilateral surveillance (including GFSR, WEO, EWE and spillover work).
  - Ensuring stability and spillover implications of macroprudential policies are discussed in Fund surveillance.
  - Conducting rigorous research into macro-financial linkages and transmission/effectiveness of macroprudential policies.
  - Helping national authorities develop capacity to monitor and assess systemic financial risks and operationalize macroprudential policy.
  - Promoting efforts to close data and information gaps, notably through the IMF/FSB/G20 data gaps initiative.
  - Providing international fora for dialogue and experience exchange (examples include the annual Financial Stability and Systemic Risk Forum and the High-level Policy Roundtables).
  - Promoting regional cooperation and understanding, including co-sponsoring regional conferences and engaging with regional macroprudential bodies (such as the ESRB).
  - Collecting, consolidating and disseminating information on policies, including by establishing a new database on macroprudential instruments.

### Issues for discussion (paragraph 113)
- 113: Questions posed for Directors:
  - Do Directors agree with the analysis and conclusions of the paper, and that they can provide a basis for the Fund’s advice on macroprudential policy?
  - Do Directors agree that the Fund should play a key role, through bilateral and multilateral surveillance and in collaboration with standard setters and country authorities, to help ensure the effective use of macroprudential policy for domestic and global stability?

*Source: Excerpts from KEY ASPECTS OF MACROPRUDENTIAL POLICY (IMF), paragraphs 101–113.*

### References

### References

### Major themes in the literature
- Macroprudential policy design, instruments, and evaluation:
  - Acharya, Viral, and Matthew Richardson (editors), 2009, “Restoring Financial Stability: How to Repair a Failed System,” Wiley Finance, New York University.
  - Arregui, Nicolas, Jaromir Benes, Ivo Krznar, Srobona Mitra, and Andre Oliveira Santos, 2013a, “Evaluating the Net Benefits of Macroprudential Policy: A Cookbook,” forthcoming (Washington: International Monetary Fund).
  - Lim, Cheng Hoon, Francesco Columba, Alejo Costa, Piyabha Kongsamut, Akira Otani, Mustafa Saiyid, Torsten Wezel, and Xiaoyong Wu, 2011, “Macroprudential Policy: What Instruments and How to Use Them, Lessons from Country Experiences,” IMF Working paper 11/238 (Washington: International Monetary Fund).
  - Committee on the Global Financial System, 2012, “Operationalising the Selection and Application of Macroprudential Instruments,” CGFS Papers No. 48 (Basel: Committee on the Global Financial System).
  - Giese, Julia, Benjamin Nelson, Misa Tanaka and Nikola Tarashev, 2013, “How Could Macroprudential Policy Affect Financial System Resilience and Credit? Lessons from the Literature,” Financial Stability Paper No. 21 (London: Bank of England).

- Indicators, measurement, and early warning:
  - Arsov, Ivailo, Elie Canetti, Laura Kodres, and Srobona Mitra, 2013, “Near-Coincident Indicators of Systemic Stress,” IMF Working Paper, forthcoming (Washington: International Monetary Fund).
  - Cerutti, Eugenio, Stijn Claessens and Patrick McGuire, 2011, “Systemic Risk in Global Banking: What Available Data Can Tell Us and What More Data are Needed?” IMF Working Paper 11/222 (Washington: International Monetary Fund).
  - Drehmann, Mathias, and Mikael Juselius, 2012, “Do Debt Service Costs Affect Macroeconomic and Financial Stability?” BIS Quarterly Review, September (Basel: Bank for International Settlements).
  - Lund-Jensen, Kasper, 2012, “Monitoring Systemic Risk Based on Dynamic Thresholds,” IMF Working Paper 12/159 (Washington: International Monetary Fund).

- Instruments targeting credit, housing, liquidity, and leverage:
  - Crowe, Christopher W., Deniz Igan, Giovanni Dell’Ariccia, and Pau Rabanal, 2011, “How to Deal with Real Estate Booms,” IMF Staff Discussion Note 11/02 (Washington: International Monetary Fund).
  - Dell’Ariccia, Giovanni, Deniz Igan, Luc Laeven, and Hui Tong, with Bas Bakker and Jerome Vandenbussche, 2012, “Policies for Macrofinancial Stability: How to Deal with Credit Booms,” IMF Staff Discussion Note 12/06 (Washington: International Monetary Fund).
  - Igan, Deniz, and Heedon Kang, 2011, “Do Loan-to-Value and Debt-to-Income Limits Work? Evidence from Korea,” IMF Working paper 11/297 (Washington: International Monetary Fund).
  - Stein, Jeremy C., 2013, “Overheating in Credit Markets: Origins, Measurement and Policy Responses,” Remarks at a Research Symposium sponsored by the Federal Reserve Bank of St. Louis, February 7, 2013.

- Institutional design, accountability, and cross-border issues:
  - Goodhart, Charles A. E., 2011, “The Macroprudential Authority: Powers, Scope, and Accountability,” OECD Journal: Financial Market Trends Vol. 2011, No. 2.
  - Nier, Erlend W., Jacek Osiński, Luis I. Jácome, and Pamela Madrid, 2011, “Institutional Models for Macroprudential Policy,” IMF Staff Discussion Note 11/18 and Working Paper 11/250 (Washington: International Monetary Fund).
  - Ostry, Jonathan D., Atish R. Gosh, Karl Habermeier, Luc Laeven, Marcos Chamon, Masvash S. Qureshi and Annamaria Kokenyne, 2011, “Managing Capital Inflows: What Tools to Use?” IMF Staff Discussion Note 11/06 (Washington: International Monetary Fund).
  - Federal Deposit Insurance Corporation and Bank of England, 2012, “Resolving Globally Active, Systemically Important, Financial Institutions,” Joint paper, December 12.

### Empirical evidence and country experiences
- Use and trends:
  - Paragraph 114: A dataset on macroprudential polices compiled by Lim and other (2013) suggests that over the last ten years there was an increasing use of macroprudential tools (Figure 6). EMEs have been using a broad range of tools to target risks from housing market, credit growth foreign indexed loans and foreign currency mismatches. An increasing number of advanced economies have also implemented macroprudential tools, often to target systemic risk in mortgage and housing markets (examples include Canada, Hong Kong, Israel, Netherlands, Norway, Singapore, Switzerland and Sweden).
  - Figure 6: Introduction/Changes of Macroprudential Tools (Number of countries). Time columns shown in source: 2000-2002, 2002-2004, 2004-2006, 2006-2008, 2008-2010, 2010-2012. Vertical axis ticks shown in source: 0, 5, 10, 15, 20, 25, 30, 35, 40, 45. Source attribution in figure: IMF staff based on Lim and others (2013). Note in figure: Each column represents number of countries that implemented or changed a macroprudential instrument over a rolling three-year period.

- Institutional developments since the 2008 crisis (paragraph 115; selected country examples):
  - U.K.:
    - An independent FPC at the BoE was established on April 1, 2013.
    - The committee is charged with a primary objective of identifying, monitoring and taking action to remove or reduce systemic risks.
    - The FPC has a secondary objective to support the economic policy of the government.
    - Footnote: The FPC can make recommendations to any institution including to the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) on a comply or explain basis. It also has a power to direct those regulators to adjust specific macroprudential tools.
  - European Union:
    - The ESRB, created at the end of 2011 as a macroprudential authority of the EU, has played a key role in providing guidance on national macroprudential frameworks.
    - For example, Germany established a Financial Stability Committee in March 2013, consisting of the ministry of finance, the central bank, the federal financial supervisory authority and the financial market stabilization agency, with the central bank playing the leading role.
    - Footnote: The guidance recommends that central bank should play a key role in macroprudential policy. The central bank is tasked with systemic risk monitoring. It also suggests respective warnings or recommendations for corrective measures, and submits such warnings or recommendations to the Financial Stability Committee.
  - South Africa:
    - The 2011 proposal would introduce a “twin peaks” model of financial regulation and grant an explicit mandate to the central bank to oversee and maintain financial stability.
    - The Financial Stability Oversight Committee, chaired by the central bank, would facilitate information sharing between agencies and have a power to make recommendations to relevant agencies on a comply or explain basis.
  - Korea:
    - A formal Macroeconomy and Finance Meeting was newly set up in July 2012, with four agencies as members–the Ministry of Strategy and Finance (head), the Bank of Korea, the Financial Services Commission, and the Financial Supervisory Service.
    - The committee assesses external and domestic systemic risks and coordinates the use of macroprudential instruments while each agency conducts its primary policy independently.
  - New Zealand:
    - In May 2013, a memorandum of understanding (MOU) was signed between the ministry of finance and the central bank to provide governance arrangements for the use of four new macroprudential tools (LTVs on mortgage credit loans, CFR, a CCB, sectoral capital requirements).
    - Under the MOU, the central bank should consult the Minister of Finance ahead of any macro-prudential policy decision. Final policy decisions would be made independently by the Reserve Bank.

### Measurement, tools, and institutional annex pointers
- Annex I referenced: Macroprudential Tools and Institutional Arrangements (header present in source).
- Table 1 referenced: Identification and Measurement of Systemic Risk (columns and categories shown in source header, including Tools, Institutions, Markets, Sectors, Frequency, Type of Data, Low Income, Emerging, Advanced, Thresholds, Early Warning, Impact of crisis, Amplification, Spillovers/Interconnectedness).
- Paragraph 114–115 summary (policy-relevant takeaways preserved from source):
  - Over the last ten years there was an increasing use of macroprudential tools.
  - Emerging market economies (EMEs) used a broad range of tools to target housing market risks, credit growth, foreign indexed loans and foreign currency mismatches.
  - Advanced economies increasingly implemented tools to target systemic risk in mortgage and housing markets (specific country examples provided).
  - Since 2008, many countries revised institutional arrangements for macroprudential policy, creating committees, authorizing central banks, or establishing MOUs to govern tool use and decision processes.

*Source: _061013b - References (International Monetary Fund).*

### 1. Conditional Value at Risk (CoVaR)

### 1. Conditional Value at Risk (CoVaR)

### Tool summary
- Inclusion: Y
- Sector focus: Financial
- Coverage intensity: High
- Data requirements: Asset prices and balance sheet data
- Applicability across countries: Limited
- Additional binary applicability markers: Y Y Y Y Y Y Y Y
- Form of publication: W
- Main reference: Adrian & Brunnermeier, 2010

### Applicability across analytical questions (as reported)
- A (Financial institutions): Y
- B (Asset prices): Y
- C (Sovereign risk): Y
- D (Broader economy / amplification channels): Y
- E (Cross-border linkages): Y
- F (Crisis risks / probability of systemic crisis): Y

### Additional characteristics
- Identified in Table 1. Identification and Measurement of Systemic Risk (Annex II)
- Classification: Market-based systemic risk measure relying on asset prices and balance sheet information
- Publication type: Working paper (W)

*Source: Blancher and others (2013), Annex II — Table 1. Identification and Measurement of Systemic Risk.*

### 130. In response, the authorities expanded the regulatory perimeter or changed the

### _061013b - 130. In response, the authorities expanded the regulatory perimeter or changed the

### Regulatory perimeter expansions and changes to regulated-entity rules
- Authorities expanded the regulatory perimeter or changed the regulation of regulated entities to encourage better management of risks related to shadow banking activities.
- Country examples and measures:
  - Croatia:
    - The 2007 credit growth cap closed the line of credit loophole by placing limits on on-balance and off-balance sheet items separately.
    - The cap dealt with leasing problems by capturing funding of the leasing company within the credit limit.
  - Korea:
    - The perimeter of LTV regulation was expanded to cover non-banks in a few months following the 2009 regulation imposed on banks.
  - New Zealand:
    - Prudential regulation of non-bank deposit taking finance companies was transferred to the Reserve Bank.
    - A new regulatory regime was introduced in 2010 similar to the prudential regulation of banks covering requirements on capital, liquidity, related party exposures, credit ratings and governance and risk management.
  - United States:
    - The FSOC was empowered to designate non-bank financial companies as systemically important, subjecting such companies to supervision and regulation by the Federal Reserve.
    - The Dodd-Frank Act's “skin-in-the-game” credit risk retention requirement is intended to provide sponsors with a meaningful incentive to monitor and control the quality of securitized assets and align the interests of the sponsor with those of investors.
    - Long experience exists in the United States with regulation of margin lending in securities markets (surveyed in Elliott and others (2013)).

### The G-20 Data Gaps Initiative (DGI)
- Motivation and governance:
  - The global financial crisis revealed key data gaps that must be addressed to facilitate financial stability analysis and smooth functioning of financial markets.
  - In November 2009 the G-20 economies requested the IMF and FSB to recommend data enhancements and improvements to statistical frameworks, which led to the data gaps initiative (DGI).
  - The DGI is supported by an Inter-Agency Group (IAG) comprised of the BIS, European Central Bank, Eurostat, IMF (chair), OECD, UN, and the World Bank.
- Scope and outputs:
  - The G-20 endorsed the 20 recommendations of the IAG, designed to address:
    - the build-up of risk in the financial sector;
    - cross-border financial linkages;
    - vulnerability of domestic economies to shocks; and
    - improve communication of official statistics.
  - Establishment of a set of Principal Global Indicators increased availability and broader dissemination of internationally comparable data.
  - The DGI underpinned the IMF’s 2011 Triennial Surveillance Review and the strengthening of the Fund’s Data Standards Initiatives through establishment of a third tier, the SDDS Plus.
    - The SDDS Plus commits “adherents” to rigorous dissemination standards for coverage, periodicity, and timeliness, of time series data.
- Ongoing engagement and challenges:
  - STA undertakes regular bilateral visits on the DGI to G20 member countries, and organizes regional conferences and high-level events, such as the High Level Forum on Statistics and Financial Stability that will take place in November 2013.
  - Remaining challenges include:
    - sustaining the momentum and pace of progress;
    - ensuring the G-20 countries’ continued implementation of the work program;
    - completing work on the new conceptual/statistical frameworks being developed by international institutions; and
    - ensuring adequate resources to support countries’ data enhancement programs.

### Global interconnectedness and systemic risk
- Broad trends:
  - Financial globalization has been reflected in the over six-fold increase in the external assets and liabilities of nations as a share of GDP.
  - There has been a sharp increase in cross-border lending and investment activities of banks, in particular since the late 1990s.
- Risks and transmission:
  - Financial globalization brought benefits (more efficient intermediation of savings, diversification of risks) but increased vulnerabilities.
  - The speed with which illiquidity and losses in some markets spread during the crisis evidences risks associated with interconnectedness.
  - Shocks can be amplified and transmitted through common intermediaries that collectively become overexposed in upswing and overly risk-averse in downswing.
- Cross-border activity challenges:
  - In countries with a high share of foreign banks and absent information on parent institutions and their exposures, it is difficult for national authorities to assess domestic systemic risk.
  - Cross-border activity complicates transmission of macroprudential policy action, especially where countries are home or hosts of globally systemically important institutions.
- G-SIFI geographic footprint and data needs:
  - Closer analysis of the geographic footprint of G-SIFIs is critical to understand unintended consequences of macroprudential actions.
  - Analysis is hampered by significant data gaps on activities and exposures and by wide international diversification.
  - Some twelve G-SIFIs derive more than half of their revenues from outside their home country, including three G-SIFIs exceeding the 75 percent mark.
  - For bilateral and multilateral surveillance, bridging data gaps and developing additional analytical tools are essential to understand financial interconnections and systemic risk concentrations and to guide macroprudential policy dialogue.

### Reciprocity Principle: Countercyclical Capital Buffer (CCB) framework
- CCB determination and reciprocity:
  - Under the BCBS proposal, each jurisdiction determines the CCB for credit exposures to counterparties in its country.
  - According to the reciprocity principle the home supervisor ensures that for an internationally active bank domiciled in its jurisdiction the CCB is calculated on a consolidated basis, according to the geographic location of its exposures.
  - The CCB for internationally active banks will be a weighted average of the CCBs being applied in jurisdictions to which the bank have an exposure.
  - The home supervisor is not allowed to impose a buffer requirement for credit exposures to a foreign country that is below the requirement set by the host supervisor.
  - The home supervisor can set a higher buffer requirement for foreign exposures, but the mandatory reciprocity principle would not apply to the amount of the buffer above 2.5 percent.
  - Reciprocity with respect to add-on buffers higher than 2.5 percent would be voluntary.
- Treatment of banks:
  - Banks with domestic credit exposures are subject to the full amount of the CCB determined by their respective supervisor.
  - The CCB of internationally active banks will reflect the structure of their domestic and foreign exposure.
  - Table 3 provides an example for four countries and two internationally active banks (Table not reproduced here).

*Prepared by Ivo Krznar and Heedon Kang (MCM); Andrew Kitili (STA); Vanessa Le Lesle, Shuntaro Hara, and Manju Ismael (SPR); Chikako Baba and Tomas Javier Mondino (MCM); Ivo Krznar and Johannes Ehrentraud (MCM).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_061013b.pdf_