Macro-Prudential Policies: Putting the “Big Picture” into Financial Sector Regulation
IMF Blog, October 22, 2010
Source details
- Canonical URL
- Macro-Prudential Policies: Putting the “Big Picture” into Financial Sector Regulation
Other formats
Bibliographic details
- Authors: John Lipsky
- Published: October 22, 2010
Context and consensus
- Publication: John Lipsky, October 22, 2010
- The global financial crisis demonstrated that pre-crisis financial regulation “didn’t take the ‘big picture’ of the system as a whole sufficiently into account” and supervisors in many markets “missed the forest for the trees.”
- There is now broad consensus on the need for macro-prudential regulation, despite the fact that macro-prudential regulation “had been used relatively little” previously and “there are no agreed standards that can be applied internationally.”
- Post-crisis reforms in traditional micro-prudential regulation have made substantial progress through cooperation in international standard-setting bodies, with improved international accords agreed “in time for the upcoming summit for the leaders of the Group of Twenty industrialized and emerging market economies (G-20) in Seoul.”
Macro-prudential conference in Shanghai
- The Peoples’ Bank of China hosted an IMF-sponsored conference in Shanghai titled Macro-Prudential Policies: Asian Perspectives.
- The conference brought together central bankers and senior financial officials from Asia and around the world to examine key issues regarding macro-prudential policies and to allow international participants and Fund staff to benefit from the views of key Asian policymakers.
Aims and objectives of macro-prudential policy
- Primary objective:
- “To prevent a crisis like the one just experienced.”
- Key challenges and objectives identified:
- Ensure the safety and soundness of the entire financial system and capture how the economic and financial systems affect each other.
- Detect and respond to the build-up in system-wide risks, not just the condition of individual institutions.
- Design and implement policies that short-circuit cross-institution or cross-market knock-on effects that magnify problems.
- Reduce the likelihood that the system as a whole will experience knock-on effects by seeking to dampen swings in credit and financial cycles that produce financial system volatility harmful to financial markets and the broader economy.
Means of implementation: instruments and design
- Price-based instruments:
- A proposed option is a capital surcharge or levy based on the degree of systemic risk created by a specific financial institution—adding a new capital layer to classic micro-prudential minimum capital requirements to reflect systemic importance.
- Rationale: Modulate institution behavior by making activities that contribute to systemic risk more costly.
- Quantity-based instruments:
- Proposals include constraints on size, legal structure, or certain activities by financial institutions.
- Caution: Quantity-based instruments “may be more subject to gaming and regulatory arbitrage.”
- Market-focused measures:
- Because systemic risks refer to markets as well as institutions, measures to make key markets more resilient should be considered.
Effective implementation through cooperation and institutional design
- Cross-border coordination:
- A cooperative solution is required to ensure macro-prudential policies in different countries do not contradict or offset each other.
- Supervisors need to focus on cross-border exposures.
- Effective resolution of large, complex, multi-jurisdictional financial institutions requires a clearly-designed cross-border framework to reduce moral hazard and support financial stability.
- The IMF has proposed a pragmatic approach and “hope[s] a small set of countries that house the most interconnected firms will begin to make progress in this area.”
- Institutional responsibility:
- An open question is which agency should design and implement macro-prudential policies—a new global body, a central bank, or the existing micro-prudential regulatory body.
- Conference participants in Shanghai “favored this job being awarded to central banks.”
- Conditions for success:
- Regulators must be supported by:
- Good information gathering
- Clear mandates and powers
- Effective tools
- Cooperation between authorities nationally and across borders
Source: Macro-Prudential Policies: Putting the “Big Picture” into Financial Sector Regulation, John Lipsky, October 22, 2010.
Content in this bundle
- 061110 - Executive Summary
