IMF Executive Board Discusses Increasing Resilience to Large and Volatile Capital Flows—The Role of Macroprudential Policies

July 5, 2017

On June 28, 2017, the Executive Board of the International Monetary Fund (IMF) discussed a staff paper on “ Increasing Resilience to Large and Volatile Capital Flows: the Role of Macroprudential Policies.

Capital flows can bring substantial benefits for countries, but the experience is that large and volatile capital flows can also give rise to systemic financial risks. Post-crisis financial regulatory reforms have therefore focused on increasing the resilience of financial systems, and the development and mainstreaming of macroprudential policies (MPP) has been an important element of these efforts.

To provide clear and consistent advice on policies related to capital flows and MPP, the Fund adopted an Institutional View (IV) on the liberalization and management of capital flows and also developed a macroprudential framework (Key Aspects of Macroprudential Policy and Staff Guidance Note on Macroprudential Policy). Still, the task of building resilience in the face of large and volatile capital flows can be difficult for much of the Fund’s membership.

Against this background, in the recent Capital Flows—Review of Experience with the Institutional View, the IMF Executive Board supported further work in these areas, especially on the role of the macroprudential framework in addressing systemic financial risks arising from capital flows, taking into account countries’ financial and institutional development.

The paper analyzes the relationship between capital flows and systemic risk by presenting five channels through which capital flows can increase systemic risk, and discusses the scope for macroprudential measures (MPMs) to help limit the systemic risk arising from capital flows, including factors that might influence the effectiveness of MPMs in this regard. The paper also explores the complementarities between the Fund’s macroprudential framework and the IV, and identifies principles for distinguishing between MPMs and capital flow management measures (CFMs), to help ensure the Fund provides consistent advice. Finally, the paper lays out considerations for the settings of MPPs in the event of capital outflows, and discusses the role of MPPs in building resilience to facilitate the liberalization of capital flows.

Executive Board Assesment [1]

Executive Directors welcomed the discussion on the role of macroprudential policies in increasing resilience to large and volatile capital flows and a conceptual framework for identifying and assessing macroprudential measures (MPMs), which in some cases may also be capital flow management measures (CFMs). They appreciated the detailed country case studies, which provide a valuable insight from international experience in this policy area. Directors recognized that capital flows deliver significant benefits but also have the potential to contribute to a build-up of systemic financial risk, especially if they are large and volatile. They also reiterated that macroeconomic policies, including exchange rate flexibility, need to play a key role in managing risks associated with capital flows, and that MPMs and CFMs should not be used to substitute for warranted macroeconomic adjustment.

Directors agreed that macroprudential policies, in support of sound macroeconomic policies and strong financial supervision and regulation, can play an important role in helping countries harness the benefits of capital flows. MPMs can help mitigate systemic financial risks and improve the capacity of the financial systems to safely intermediate cross-border flows. Specifically, Directors noted that the use of MPMs can increase countries’ resilience to aggregate shocks, including those associated with capital flows, and can contain the build-up of systemic vulnerabilities over time. The proposed conceptual framework does not modify the Institutional View on the liberalization and management of capital flows as agreed in 2012, and Directors did not suggest changes to it. A number of Directors suggested an in-depth discussion of the question of whether CFMs can be used preemptively to manage systemic risks that may arise from capital flows. The Institutional View does not support the preemptive use of CFMs—a point reiterated by a few Directors at the meeting—although a few others saw merit in reconsidering the case. Directors also noted that the strengthening of macroprudential policy frameworks can usefully form part of broader efforts to enhance risk management, and prudential regulation and supervision so as to support capital flow liberalization.

Directors highlighted that capital outflows should be handled primarily by macroeconomic policies. Nevertheless, where sufficient buffers are in place, a relaxation of MPMs may assist in countering financial stress from outflows. Directors emphasized the need to carefully calibrate decisions on relaxing particular MPMs, mindful of the need to preserve market confidence and the financial system’s resilience to future shocks.

Directors concurred that the conceptual framework laid out in the staff paper provides a helpful basis for guiding staff assessment of measures with the goal of providing consistent, evenhanded, and well-targeted policy advice to member countries in the context of surveillance. They stressed that the context, calibration of the measure, and other country-specific circumstances should be taken into account in applying the framework. Noting the degree of judgment involved, Directors considered that a well-documented justification would be useful to understand how staff has reached a particular judgment and help inform efforts to ensure consistent and evenhanded application of the framework, as well as greater clarity regarding the basis for assessment. Some Directors urged staff to proceed with caution in categorizing measures and avoid prescriptive advice that may trigger an adverse market reaction.

Directors observed that, while experience in the use of MPMs is growing, policymakers are still learning how best to calibrate them, with a view toward maximizing their benefits and minimizing costs to financial institutions, borrowers, and economic growth. Gauging the effectiveness of specific MPMs, notably in terms of the reduction in risk and severity of crises, remains challenging. Accordingly, Directors emphasized the need to progressively build up expertise and allow the macroprudential framework to evolve over time to incorporate new experience and insights.

Directors encouraged staff to continue deepening the understanding of macroprudential policies and their effectiveness, as well as how to apply the conceptual framework appropriately, drawing lessons from country experiences. They supported the plans to compile a database of MPMs reported by member countries and to integrate staff findings into Fund surveillance and technical assistance. Directors also called for continued close engagement with member countries and relevant international institutions in this area, including on use of MPMs to address risks from cross-border capital flows. They encouraged staff to provide further opportunity to follow up on these and other issues related to capital flows, including the issues requested by the Board.

[1] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:

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