Macroprudential Policy Tools and Frameworks Jacek Osiński

Transcription

1 Macroprudential Policy Tools and Frameworks Jacek Osiński Advisor, Financial Stability & Central Banking Monetary & Capital Markets Department

2 Plan of Presentation 1. Developing concept of macroprudential policy - what are its defining elements and its role? 2. Institutional and governance arrangements for macroprudential policy 3. Macroprudential policy toolkit and how to use it

3 What is Macroprudential Policy? (Reported by % of respondents of 2010 IMF Survey) Tasks Objectives Nature of risks Tools identify, measure, monitor risks collect, analyze, share information 23.3 % 16.7 % make recommendations for remedial action 6.7% implement corrective measures 6.7% issue warnings 3.3% prevent, mitigate, limit, avoid, reduce risks 63.3% strengthen financial system resilience 16.7% lean against financial cycle 3.3% aggregate, contagious, spreading, systemwide 66.7% prudential tools 23.3% size, interconnectedness, systemically important 43.3% monetary tools 6.7% serious negative consequences on markets and economy 33.3% fiscal tools 6.7% procyclical, over time, through the cycle 20.0% exchange rate 6.7% imbalances, i.e. leverage, indebtedness, capital flows asset price bubble 16.7% management 6.7% regulation by size 3.3% competition policy/m&a 3.3% accounting rules 3.3%

4 Elements Defining the Policy Thus, defining elements of macroprudential policy should be: objective; scope of analysis; range of risks to be addressed by the policy; set of instruments; and institutional and coordination frameworks.

5 Elements Defining the Policy Objective: The objective of macroprudential policy is to identify, monitor, and limit systemic or system-wide financial risk in both time and cross-sectional dimensions. Systemic risk is a risk of disruptions in the provision of key financial services that can have serious consequences for the real economy. Scope of analysis: It should cover all potential sources of systemic risk no matter where they emerge. This should be generally a financial risk.

6 Elements Defining the Policy Range of risks to address: Macroprudential policy should focus on risks arising primarily within the financial system, or risks amplified by the financial system, leaving other identified sources of systemic risk to be dealt with by other public policies. However: some gray areas may be identified! (e.g. excessive leverage in private non-financial sector). In such cases, a mechanism should be present in public financial stability policy framework to identify policy responsibility as well as appropriate tools.

7 Defining the Macroprudential Policy Sources of Systemic Risk & Policies to Address Them Domestic Financial System Microprudential Policy Domestic Real Sector? Macroprudential Policy? Outside World Macroeconomic Conditions

8 Elements Defining the Policy Set of instruments: Prudential-type instruments should be the core of macroprudential policy toolkit, constructed or calibrated to deal specifically with systemic risk, and applied with a broader financial system perspective. Other type instruments, which could also be added to the toolkit provided that: they target explicitly and specifically systemic risk; and they are placed at the disposal of an authority with a clear macroprudential mandate, accountability, and operational independence.

9 Elements Defining the Policy Set of instruments (cont.): However: macroprudential policy could be entitled to advice or recommend activation or changes in the calibration of other policies tools to address systemic risks residing in other policies domains, but such instruments should not consist of core tools of other policies (an autonomy of the policies should be preserved!).

10 Elements Defining the Policy Institutional and coordination framework: A macroprudential authority should be identified. It should have a clear mandate and objectives, and should be given adequate powers and incentives to act, matched with strong accountability. A body or other mechanism should be in place ensuring cooperation or at least consistency among relevant policies in addressing systemic risks.

11 Elements Defining the Policy Institutional and coordination framework (cont.): However: Again, the latter should not become a Trojan horse a mechanism compromising established policy autonomy in other areas. Thus, macroprudential and other policies should be coordinated in a manner that is compatible with the achievement of each policy s objectives.

12 Summing up: Definition of the Policy* Macroprudential policy uses primarily prudential tools to limit systemic or system-wide financial risk, thereby minimizing the incidence of disruptions in the provision of key financial services that can have serious consequences for the real economy, by: dampening the build-up of financial imbalances; building defenses that contain the speed and sharpness of subsequent downswings and their effects on the economy; and identifying and addressing common exposures, risk concentrations, linkages, and interdependencies that are sources of contagion and spillover risk that may jeopardise the functioning of the system as a whole. *(source: FSB/IMF/BIS, February 2011, Macroprudential Tools and Frameworks, update to G20 Finance Ministers and Central Bank Governors)

13 Challenges in Defining the Policy However, views of countries still vary on e.g. : to whether macroprudential is a particular perspective of prudential policy or a new policy area in its own right. Some argue that prudential policy (without making a distinction between micro and macro) has always sought to strengthen the stability of the financial system as a whole. Many others emphasise that the philosophies behind micro- and macroprudential policies differ, noting the possibility of occasional tensions between them. if they differ, where are boundaries between macroprudential and microprudential (e.g. in context of a toolkit and governance framework), what to do if they are in conflict?

14 Macro- vs. Microprudential Policy Macroprudential Microprudential Policy objective Ultimate goal Characterization of risk Correlations and common exposures across firms Calibration of prudential instruments Limit financial system-wide distress Avoid output (GDP) costs linked to financial instability Dependent on collective behavior; endogenous Important In terms of system-wide risk; top-down Limit distress of individual firms Consumer (depositor/ investor/ policyholder) protection Independent of individual agents behavior; exogenous Irrelevant In terms of firm risks; bottom-up Borio, C. (2003), Towards a Macroprudential Framework for Financial Supervision and Regulation?

15 The Role of Macroprudential Policy in Financial Stability Framework Systemic Event Monetary Policy Microprudential Policy Other Policies Crisis Management Other Policies Macroprudential Policy FINANCIAL SYSTEM Financial Stability Framework Fiscal Policy DOMESTIC ECONOMY GLOBAL ECONOMY Other policies involve, e.g., policies related to business conduct, consumer protection, accounting rules, and competition,, but also an infrastructure like a resolution framework.

16 Financial Stability vs. Macroprudential Policy Mandates NO 12% NO 57% YES 43% YES 88% Financial stability mandate (outside circle) MaPP mandate (inside circle)

17 Which institution holds MaPP mandate? (22 respondent countries) Central Bank Financial stability committee Ministry of finance Banking regulator/supervisor Insurance regulator/supervisor Deposit insurance agency Securities regulator/supervisor Integrated regulator/supervisor Other

18 Institution Allocation of MaPP Responsibility Perimeter of the MaPP Toolkit What is The MaPP Perimeter? Risk Identification Formal Instruments Advice Expansive perimeter in responsibilities recommendation and toolkit Prudential (e.g., capital and loanto-value ratios) Monetary (e.g., interest rate or direct instruments) Systemic Impact Assessment Lead Institution/ Coordinator Implementation Decision to Take and Action Enforcement Responsibilities range from risk identification and systemic risk assessment, to decision making and implementation Toolkit extends beyond prudential tools (# of countries) Decision/ Co-decision Fiscal (e.g., tax policies) Capital controls Exchange rate policy Antitrust/Competition Policy Other (# of countries) Reporting to Executive or Parliament Central Bank Integrated Financial Regulator/Supervisor Banking Regulator/Supervisor Insurance Regulator/Supervisor Securities Regulator/Supervisor Ministry of Finance Deposit Insurance Agency Financial Stability Council/Committee

19 Focus on stylized models Real-life institutional models for macroprudential policies are new and emerging. Hence, it is not possible to assess the effectiveness of these models empirically. We therefore identify stylized institutional models for macroprudential policies, drawing on existing financial stability frameworks, and in light of key dimensions that differentiate them. We assess the strengths and weaknesses of these models conceptually, based upon criteria that are important for successful mitigation of systemic risks. 19

20 A typology of stylized models Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 1. Institutional integration between central bank and supervisory agencies 2. Ownership of macroprudential policy mandate 3. Role of the government 4. Separation of policy decisions and control over instruments 5. Existence of a separate body coordinating policy decisions 20

21 Stylized institutional models Features of the model/model 1. Degree of institutional integration of central bank and supervisory agencies Model I Model II Model III Model IV Model V Model VI Model VII Model R I Full (at a central bank) Partial Partial Partial No No (Partial*) No No 2. Ownership of macroprudential policy and financial stability mandate Central bank Committee related to central bank Independent committee Central bank Multiple agencies Multiple agencies Multiple agencies Committee (multinational regional) 3. Role of MOF/ treasury/government. 4. Separation of policy decisions and control over instruments No (Active*) Passive Active No Passive Active No Passive (EC; EFC) No In some areas Yes In some areas No No No Yes 5. Existence of separate body coordinating across policies Examples of specific model countries/ regions No No No (Yes**) No Yes Yes (de facto**) No No Czech Republic Ireland*(new) Singapore* Malaysia Romania Thailand United Kingdom (new) Brazil** France United States Belgium (new) Serbia The Netherlands Australia Canada Chile Hong Kong SAR* Korea** Lebanon Mexico Iceland Japan Peru Switzerland EU (ESRB)

22 Criteria for an assessment of the models A desirable institutional model should be conducive to the mitigation of systemic risk. It should provide for: Effective identification, analysis, and monitoring of systemic risk Access to relevant information Using existing resources and expertise Timely and effective use of macroprudential policy tools Strong mandate and powers Ability and willingness to act Accountability Effective coordination across policies aiming to address systemic risk Reducing gaps and overlaps Preserving the autonomy of separate policy functions 22

23 Some key desirables The central bank should play an important role in every model. Fragmentation of institutions should be avoided, but if so, should be compensated with appropriate coordination mechanisms. Participation of the treasury in policy process is useful, but a leading role may pose risks. Systemic risk prevention and crisis management are different policy functions and should be supported by separate organizational arrangements. 23

24 Some key desirables At least one institution involved in assessing systemic risk should have access to all relevant data and information. Institutional mechanisms should support willingness to act against the buildup of systemic risk and reduce the risk of delay in policy actions. A leading macroprudential authority should be identified, vested with mandate and powers, and subject to formal accountability. Macroprudential policy frameworks should not compromise the autonomy of other established policies. 24

25 General Conclusions from Analysis All models have strengths and weaknesses, but not all models appear equally supportive of effective macroprudential policy making. There are additional mechanisms to address potential weaknesses. However, no one-size-fits-all. Countries specificities are also important in building a macroprudential policy framework. For instance: institutional factors (quality of existing institutional arrangements, legal traditions), political economy considerations, cultural issues; the availability of resources. 25

26 Perimeter of the Macroprudential Toolkit Instruments Prudential (e.g., capital and loanto-value ratios) Monetary (e.g., interest rate or direct instruments) Advice Formal recommendation (# of countries) Decision/ Co-decision Fiscal (e.g., tax policies) Capital controls Exchange rate policy Antitrust/Competition Policy Other 3 1 6

27 Prospective of AE and EM Countries Advanced countries (# of countrries) Level of Authority Instruments that are available to the Formal Decision/ Codecision Advice macroprudential authority recommendation A P A P A P Prudential (e.g., capital and loan-to-value ratios) Monetary (e.g., interest rate or direct instruments) Fiscal (e.g., tax policies) Capital controls Exchange rate policy Antitrust/competition policy Other Emerging market countries (# of countrries) Level of Authority Instruments that are available to the Formal Decision/ Codecision Advice macroprudential authority recommendation A P A P A P Prudential (e.g., capital and loan-to-value ratios) Monetary (e.g., interest rate or direct instruments) Fiscal (e.g., tax policies) Capital controls Exchange rate policy Antitrust/competition policy Other

28 What Are Macroprudential Instruments? Tools Time-dimension Risk Dimensions Cross-Sectoral Dimension 1. Instruments developed specifically to mitigate systemic risk 2. Recalibrated instruments Countercyclical capital buffers Through-the-cycle valuation of margins or haircuts for repos Levy on non-core liabilities Countercyclical change in risk weights for exposure to certain sectors Systemic capital surcharges on SIFIs Systemic liquidity surcharges on SIFIs Levy on non-core liabilities Higher capital charges for trades not cleared through CCPs Time-varying LTV, Debt-To-Income (DTI) and Loan-To-Income (LTI) caps Time-varying limits in currency mismatch or exposure (e.g. real estate) Time-varying limits on loan-to-deposit ratio Time-varying caps and limits on credit or credit growth Dynamic provisioning Stressed VaR to build additional capital buffer against market risk during a boom Rescaling risk-weights by incorporating recessionary conditions in the probability of default assumptions (PDs) Powers to break up financial firms on systemic risk concerns Capital charge on derivative payables Deposit insurance risk premiums sensitive to systemic risk Restrictions on permissible activities (e.g. ban on proprietary trading for systemically important banks) 28

29 Instruments and Risks Credit-related: Caps on the loan-to-value (LTV) ratio Caps on the debt-to-income (DTI) ratio Caps on foreign currency lending Ceilings on credit or credit growth Liquidity-related: Limits on net open currency positions/currency mismatch (NOP) Limits on maturity mismatch Reserve requirements Capital-related: Countercyclical/time-varying capital requirements Time-varying/dynamic provisioning Restrictions on profit distribution Risks generated by strong credit growth and asset price inflation; Systemic liquidity risk ; Risks arising from excessive leverage and the consequent de-leveraging; - including risks related to large and volatile capital flows. 29

30 What Affects the Choice of Instruments? Economic Development Stage Size of Financial Sector Exchange Rate Regime Size and Type of Capital Inflows 30

31 How Are the Instruments Used? Multiple Broad-based Time-varying Rule 8 92 No coordination (percent) 31

32 Effectiveness of the Instruments Dampening procyclicality of credit growth? Limiting interconnectedness in exposures to wholesale funding? of leverage? Three Approaches to foreign funding? 1 case study 2 simple correlation 3 panel regression 32

33 1. Case Study Small but diverse group of countries: China Colombia Korea New Zealand Spain USA Some Eastern European countries Instruments seem to have achieved, to various degrees, their intended objectives 33

34 Credit Growth (Percent Quarterly) Credit Growth (Percent Quarterly) 2. Simple Correlation Change in Credit Growth After the Introduction of Instruments (y/y change) Dynamic Provisioning 1.0% (average across countries) (y/y change) 1.0% DTI 0.5% 0.0% t-2 t-1 t t+1 t+2 t+3 t+4 0.5% 0.0% -0.5% t-2 t-1 t t+1 t+2 t+3 t+4-0.5% -1.0% -1.0% -1.5% -2.0% -1.5% -2.5% -2.0% No Dynamic Provisioning (blue) Dynamic Provisioning (red) 5% 4% 3% 2% 1% Quarterly 0% -10% -5% 0% 5% 10% -1% GDP Growth (Percent Quarterly) -2% -3% -4% -5% -3.0% Credit Growth vs. GDP Growth No Caps on DTI (blue) Caps on DTI (red) 5% 4% 3% 2% 1% -2% -3% -4% -5% Quarterly 0% -10% -5% 0% 5% 10% -1% GDP Growth (Percent Quarterly) 34

35 3. Panel Regression Statistically Significant ( ) or Not ( ) Reductions in: Procyclicality of Interconnectedness Credit Leverage Caps on LTV Caps on DTI Limits on Credit Growth Foreign Funding Wholesale Funding Limits on NOP Limits on Maturity Mismatch Reserve Requirements Time-varying/Dynamic Provisioning Countercyclical/Time-varying Capital Requirements 35

36 Lessons and Policy Messages Many instruments are found to be effective Effectiveness does not seem to depend on: stage of economic development, exchange rate regime Calibrating the instruments may be difficult; it should take into account: the type and source of risk, the ability of the financial system to circumvent the measure, the quality of supervision and enforcement, and the governance and accountability arrangements Useful to adjust macroprudential instruments at different phases of the cycle to smooth out cyclicality 36

37 Lessons and Policy Messages Instruments that vary through the cycle based on rules have clear advantages and should be used to the extent possible. When discretion is necessary, policymakers should explain the rationale behind their actions publicly to enhance policy transparency and effectiveness. Well coordinated actions across policy areas are a necessary condition for a successful response to systemic risk As with regulation in general, there are costs involved may lower growth unnecessarily, may generate unintended distortions, benefits should be weighed against costs. 37

38 Lessons and Policy Messages Instrument How to use Pros Cons Do s and Don ts Single vs. Multiple Single Multiple Easier to calibrate, communicate, administer and assess effectiveness Help tackle a risk from various angles More effective for multiple sources of risk Insufficient for multiple sources of risk or higher probability of circumvention Impose a higher cost on regulated institutions Use when risk is well-defined from a single source Do not overdo the use of multiple instruments and impose costs that are too high Targeted vs. Broad-based Broad-based Targeted Wider impact Smaller scope for circumvention Achieve objective while minimizing cost or potential distortions; avoid bluntness of other policies May have a higher cost or larger distortions Granular data requirement Higher administrative cost Higher probability of circumvention Use if granular data are not available and risks are generalized Be ready to adjust fine-tuning; anticipate channels for evasion Supplement with broader-based measures to limit the scope for circumvention Avoid excessive complexity Fixed vs. Time-varying Rules vs. Discretion Fixed Time-varying Rules-based Provide a minimum buffer Low administrative cost Avoid timing the cycle Lean against the wind, countercyclical Transparent, lower risk of inaction Provide regulatory certainty May be ineffective in rapidly changing circumstances Ad hoc and frequent changes may be disruptive Hard to time the cycle Susceptible to circumvention Changes to calibration may be necessary Adjust parameters with changing circumstances Design sound and transparent principles governing the adjustment Use when risk of inaction is high and risk management and supervision capacity is weak. Re-assess calibration periodically Discretionary Flexible, take into account different situations, types of risks and structural changes Less transparent No regulatory predictability: subject to regulatory capture Use when have deep structural changes and rapidly evolving risks Do not overdo, use constrained discretion 38

39 Thank you for attention; and Happy to answer questions 39