Financial Stability Committees: Learning from the Experts

IMF Blog, June 16, 2015

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Macroeconomists and financial sector experts need to talk to each other to identify and measure systemic risks and to coordinate and/or conduct macroprudential policies—rules that reduce instability across the financial system.
Financial stability committees provide a forum to share information about evolving risks, develop monitoring and mitigating tools, and define decision-making authority, accountability, and communication to the general public.
A conference in Lima, Peru—organized by the IMF and the Central Reserve Bank of Peru—brought together experts from advanced countries and Latin American regulators that have established financial stability committees to share experiences and discuss early lessons about the functions and governance of these committees.

Financial stability committees involve all major stakeholders—including central banks, ministries of finance and financial supervisors—but governance structures differ across countries.
Differences in governance relate to existing (pre-crisis) arrangements, different trade-offs with other policies (monetary, microprudential), as well as legal and institutional constraints.
Central banks play a central role in the coordination of stability mandates, owing to their expertise, credibility, and independence, but in many countries it is the ministry of finance that has the lead—due to their role in the budget and legislative processes.
Examples from Latin America:
- In Chile and Mexico the Ministry of Finance chairs the financial stability committee, but the central bank has an important role as an advisor or in leading the analytical work.
- Brazil has followed a model closer to the United Kingdom, where a dedicated committee within the central bank coordinates the activities of all supervisory agencies.
Besides sharing data and conducting analytical studies, these committees could have higher powers, such as asking other agencies to “comply or explain” why the committees’ recommendations were not followed, thus increasing transparency and accountability.
The debate on the best governance structure has not yet been settled in the profession.

The interaction between monetary and macroprudential policies was a key topic of debate.
Many participants supported a separation of both policies in principle, except when a well-articulated cost-benefit analysis shows the advantages of “leaning against the wind” of financial (in)stability for the monetary authority.
Example of trade-offs:
- An early tightening of monetary policy to contain increases in household debt may thwart an economic recovery—with the costs of increased unemployment outweighing the marginal benefits of reduced debt.
Challenges:
- Articulating and/or estimating these costs and benefits is quite challenging, and may lead to inaction or aggressive action (as seen in Sweden in the recent past).
- Developing the analytical skills for this type of analysis is central to the effectiveness of these committees.
Because both policies affect financial conditions and analytical skills may be in short supply in emerging markets, a stronger coordination between macroprudential and monetary policies may be warranted for some countries.

Three key issues emerged from the discussions and presentations of Latin America’s experience:
- First, there are concerns about the legal uncertainty of actions undertaken by the financial stability committees for the heads of agencies bound by their own legal frameworks. Clear objectives, mandates, and powers for members of these committees are thus critical to prevent this legal uncertainty.
- Second, most financial stability committees focus on macroprudential policies and have an unclear role in crisis resolution or when financial stability is threatened, whereas public perceptions may relate more to the committees’ role in crisis than in normal times.
- Third, from an emerging market perspective, issues like the impact of capital flows volatility, foreign exchange and asset price dynamics on balance sheets and financial stability require a central role for central banks—even if the lead in the committee is with the ministry of finance.
Regardless of the institutional design, it is critical to build an interface between macroeconomists and financial sector experts.
More discussion and debate on these issues can contribute to building the right institutions for financial stability.

Jorge Roldós, Alejandro Werner — June 16, 2015