Making macroprudential policy a reality Stephen Cecchetti Economic

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.

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

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

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 4

Outline 1. Concepts and objectives 2. Metrics and tools 3. Road ahead 4. Questions and hazards 5

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

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

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

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

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

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

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