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Making macroprudential policy a reality

Making macroprudential policy a reality. Stephen Cecchetti * Economic Adviser and Head Monetary and Economic Department Bank for International Settlements * Views expressed here are those of the author and do not necessarily reflect those of the BIS. 1.

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Making macroprudential policy a reality

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  1. Making macroprudential policy a reality Stephen Cecchetti* Economic Adviser and Head Monetary and Economic Department Bank for International Settlements *Views expressed here are those of the author and do not necessarily reflect those of the BIS. 1

  2. What is macroprudential policy? Definition: Prudential policy with a system-wide perspective

  3. What is macroprudential policy? Definition: Prudential policy with a system-wide perspective Microprudential: Address the risk of individual bank failure

  4. What is macroprudential policy? Definition: Prudential policy with a system-wide perspective Microprudential: Address the risk of individual bank failure Macroprudential: Address the risk of system failure

  5. Outline • Concepts and objectives • Metrics and tools • Road ahead • Questions and hazards

  6. Why regulate the financial system? • Old rationale • Consumer protection: disclosure and prohibitions • Competition: maximum size • Panics: deposit insurance • Old response: microprudential • Capital regulation • Individual failure accepted

  7. Why regulate the financial system? • New rationale: externalities beyond panics • Common exposures and interlinkages • Procyclicality and fire sales • New response: macroprudential • Address systemic risk • Reduce real  financial feedback

  8. Macroprudential metrics • Common exposures and interlinkages • Cross-jurisdictional activity • Size • Interconnectedness • Substitutability of products • Complexity • Correlation • Procyclicality and fire sales • Credit growth • Asset price booms

  9. Macroprudential tools • Common exposures and interlinkages • More capital • More liquidity • Leverage ratio • Limits on interbank exposure, currency mismatches… • Procyclicality and fire sales • Capital buffers • Dynamic provisioning • Haircuts and margin practices • Time-varying risk weights, loan-to-value ratios….

  10. Road ahead • Systemically important financial institutions (SIFIs) • Improved resolution regimes • Regulatory perimeter and shadow banking system • Data gaps

  11. Questions • Measuring systemic risk • Calibrating tools • Judging performance & holding policymakers accountable • Success is invisible, diffuse and long-term, • Impact observable, concentrated and immediate • Rules vs. discretion

  12. Hazards in designing macroprudential policy • Viewing it as a substitute for good monetary or fiscal policy • Ignoring incentive compatibility • Turning it in to financial repression • Complacency

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