Rules, Discretion, and Macro-Prudential Policy

IMF Working Papers, March 8, 2013

Source details

Macro-prudential frameworks require coordination, flow of information, analysis, and communication, which create weaknesses that make implementation difficult.
Dealing with the political economy of macro-prudential policy is likely to be challenging.
Limiting discretion by formulating macro-prudential rules is complicated by difficulties in detecting and measuring systemic risk.
Oversight is best served by having a strong baseline regulatory regime on which a time-varying macro-prudential policy can be added as conditions warrant and permit.

Subject: Asset and liability management; Banking; Commercial banks; Financial crises; Financial institutions; Financial sector policy and analysis; Liquidity; Systemic risk; Systemic risk assessment
Keywords: bank; bank regulator; central bank; central bank leadership; Commercial banks; financial stability; Global; input consist; liquid asset; Liquidity; Macro-prudential policy; market; market liquidity; markets regulator; regulation; regulator; repo market; systemic risk; Systemic risk assessment; WP

Maintain a strong baseline regulatory regime as the foundation for oversight.
Implement time-varying macro-prudential measures layered on the baseline regime when conditions warrant and permit.
Recognize and plan for institutional and informational weaknesses inherent in macro-prudential frameworks.
Account explicitly for political economy constraints when designing macro-prudential frameworks.
Exercise caution in relying exclusively on rule-based limits to discretion given challenges in detecting and measuring systemic risk.

Source: IMF Working Paper "Rules, Discretion, and Macro-Prudential Policy" by Itai Agur and Sunil Sharma, March 8, 2013.