Macroprudential Policy—Filling the Black Hole
IMF Blog, April 8, 2011
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Bibliographic details
- Authors: Jose-Vinals
- Published: April 8, 2011
Overview
- Author: José Viñals
- Date: April 8, 2011
- Main message: The global financial crisis revealed a "gaping hole" in policy toolkits. Macroprudential policy is intended to contain system-wide risks in the financial sector and requires a coherent framework, new tools, and stronger international cooperation.
Systemic risk indicators and policy tools
- Systemic risk indicators focus on system-wide risks (not individual institutions) and include:
- resilience of the financial system to shocks
- availability of funding in financial markets
- market participants’ interconnectedness
- household indebtedness
- international capital flows
- Policy tools listed include:
- countercyclical capital requirements
- loan-to-value ratios to address housing bubbles
- systemic capital and liquidity surcharges reflecting institutions’ contribution to systemic risk
Progress reported and evidence needs
- IMF Executive Board discussed a new IMF paper describing main elements of macroprudential policy.
- The paper draws on a survey of 63 member countries.
- The paper and Board discussion indicate:
- significant progress has been made, but unevenly
- further efforts are needed to develop new tools and broader, forward-looking measures of systemic risk
- a policy framework based on international best practices is needed to reduce regulatory arbitrage by global financial firms
- Open empirical questions highlighted:
- How strong is the evidence that macroprudential policies can prevent or contain asset price bubbles?
- Which policy tool—or combination of tools—should be used?
- How to manage conflicts with monetary and fiscal objectives?
- Which institutions are best placed to detect and contain systemic risks?
Policy objectives and roles
- Macroprudential policy complements (and differs from) traditional macroeconomic policies and micro-prudential measures by focusing on the health of the financial system as a whole.
- Two interrelated drivers of systemic risk that new tools would target:
- (i) risks associated with swings in credit and liquidity cycles driven by pro-cyclical forces such as leverage and herding behavior by financial institutions, non-financial firms, and households
- (ii) concentration of risk in highly interconnected financial institutions and markets within and across national borders
Challenges and recommended actions for policymakers
- Key tasks identified:
- Create a comprehensive analytical framework and a consistent set of policy tools, including through rigorous back-testing.
- Establish macroprudential authorities with clear mandates to enhance accountability and reduce the risk of political pressure; institutional arrangements should reflect country-specific characteristics.
- Assure addressing all systemic risks and manage potential policy conflicts through cooperation among national authorities.
- Increase international cooperation to ensure the consistent application of national macro-prudential policies.
- The IMF commits to support such efforts through its surveillance mandate and financial sector expertise.
International process and next steps
- The G-20 requested the IMF, FSB, and BIS to develop a coherent macroprudential policy framework.
- The author anticipates a joint IMF-FSB-BIS progress report on the new macroprudential policy framework to be discussed at the G-20 Summit in November 2011.
- Closing argument: collective efforts to "fill the policy black hole" are framed as the best chance of avoiding future crises.
Source: IMF Blog post "Macroprudential Policy—Filling the Black Hole" by José Viñals, April 8, 2011. The IMF is an organization of 191 countries.
Content in this bundle
- Macroprudential Policy: An Organizing Framework; IMF Policy Paper; March 14, 2011
- Macroprudential Policy: An Organizing Framework--Background Paper; IMF Policy Paper; March 14, 2011