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“Macro…, what?!” The New Buzz on Financial Stability

From iMFdirect:

Just a few years ago, “Macro…, what?!” would have been a typical reaction to hearing the technical term that today is the talk of the town among financial regulators.

But in the aftermath of the global financial crisis, macroprudential policy—which seeks to contain systemic risks in the financial system—has indeed come to be an important part of the overall policy toolkit to preserve economic stability and sustain growth.

For example, a number of countries, especially emerging markets, have been relying on macroprudential policies (such as loan-to-value or debt-to-income ratios, or countercyclical loan loss provisions) to rein in rapid credit growth, which—if unchecked—could destabilize the financial system and, ultimately, bring about a recession and drive up unemployment.

The IMF has assumed a leadership role in macroprudential policy analysis. Our recent analysis examines policy options for designing effective institutional frameworks and instruments.

Macroprudential policy design is still very much a work in progress, and many countries are learning by doing. That is one reason why in our work we underscore that there is no “one size fits all” institutional design for macroprudential policy and that macroprudential instruments should be specific enough and based on clear rules that still allow for adjustments during the business cycle. We also assess regional approaches to implementing macroprudential policy, for example in Latin America.

 

Designing effective macroprudential policies

Recently, we co-hosted with the Central Bank of Uruguay a high-level regional conference on how macroprudential policies can help achieve financial stability. The conference gathered central bank presidents, financial supervisors, and other senior policymakers from Latin America and some advanced economies to exchange views on topics such as the proper institutional design for macroprudential policies and effective instruments. The presentations by the participants are available here.

Conference participants spoke about challenges with designing and implementing macroprudential policy frameworks. Participants agreed that financial stability is a responsibility shared by all policies. Strong macroeconomic policy frameworks, especially with flexible exchange regimes, were seen as essential to prevent the accumulation of financial imbalances that could lead to systemic risk.

Many participants noted that effective microprudential policies, including effective supervision, are also critical to prevent excessive risk taking by individual financial institutions, which could lead to broader systemic risks. However, while acknowledging the critical role of macroprudential tools, they recognized that the full effects of such tools are still not well understood.

Read more...

To download the PDF version of the working paper click here.


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