Commens on Marrying Moneary Policy wih Macroprudenial Regulaion: Exploring he Issues by Nakornhab and Rungcharoenkikul By Andrew Filardo, BIS Prepared for he Bank of Thailand Inernaional Symposium 2010 on Challenges o Cenral Banks in he Era of he New Globalizaion, Bangkok, Thailand, 15 Ocober 2010 * The views are hose of he auhor and do no necessarily represen hose of he Bank for Inernaional Selemens Inroducion Paper offers new hinking (2 models) for cenral banks abou how o incorporae regulaory reforms in a moneary policy framework. How do rule-based prudenial regulaory measures impac he moneary ransmission mechanism? Key ake-aways for me: 1) Capial requiremens can be subsiues for policy raes 2) Provides a foundaion for moneary auhoriies having a bigger role in designing financial sabiliy measures 3) R may no be an effecive macroprudenial ool
Informing The Macroprudenial Debae Turning he ables on he lean versus clean debae Convenional lean view: use R o influence financial cycle A new view: using macroprudenial for demand managemen; ie are macroprudenial ools really subsiues for R in moneary policy? Imporance of paper: a rigorous modeling mehod wih focus squarely on policy implicaions How imporan is his macroprudenial perspecive? Model 1: Counercyclical Capial And MP Sandard moneary policy model (IS and PC equaions) augmened wih a banking secor Bank lending driven by reduced-form relaionship beween deposi and bank capial [deeper microfoundaions?] Counercyclical capial regulaion consrain: N c + Min capial raio+capial conservaion buffer 1 γ 1 Y Y γ 2 B Couner-cyclical capial buffer
Macroprudenial Tools: Complemens or Subsiiues? The heory says hey can boh! Resuls from paper: Counercyclical capial buffers resrain aciviy Capial consrain ends o weaken he MTM They help wih demand managemen when here are demand shocks bu no supply shocks Key resul: if policymakers care sufficienly abou oupu sabilizaion, he cenral bank could choose an opimal couner-cyclical capial requiremen ha yields higher welfare han he unconsrained alernaive How Powerful Is This Channel? Asian banks already have ample capial buffers
Empirical Evidence Weak Channel? From Macroeconomic Assessmen Group Repor (2010) Impac of a 1% increase in capial raio GDP impac Comparaive Impacs On GDP By Policy Tool Impac of a 1% increase in capial raio.1%-.2% Impac of a 1% increase in fed funds.5%+ Impac of a 1% increase in G/Y.9%+ (in firs year) This capial charge channel appears very weak!
Quibbles Abou Assumpions Benefis of he counercyclical capial raio in model depend oo heavily on 2 assumpions: 1) Bank capial drives lending behavior in model. In pracice, loan supply is no so inelasically supplied Cyclically, banks can shed non-loan asses o adjus capial raios Non-bank capial markes and reained earnings allow for alernaive funding when capial raios change Two Birds Wih One Sone? 2) Model assumes bank capial proporional o oupu gap (eq 2.6) n =n oupugap x bank capial Business, financial and asse price cycles no perfecly correlaed hey can be quie ou of synch
Business, Credi And Asse Price Cycles Cycles are no synchronized! Two Birds Wih One Sone? 2) Model assumes bank capial proporional o oupu gap (eq 2.6) n =n oupugap x bank capial Business, financial and asse price cycles no perfecly correlaed hey can be quie ou of synch If cycles sufficienly asynchronous, radiional assignmen problem (ie 1 ool, 1 goal) reduces he scope for policy ool subsiuabiliy
Final Commens On Model 1 Levels Maer! Linearizing around he seady sae complicaes conclusions capial levels maer in welfare calculaions! Why do capial requiremens maer in pracice? Message from in l financial crisis capial prevens incenives o gamble wih oher people s money Model doesn really disinguish beween capial raios binding a 2% or 13%. Wha is missing? Capial raios also influence he variance of he demand and supply shocks All hese influence he welfare calculaions! Model 2: Thinking Abou Financial Insabiliy The auhors exend he research of Adrian and Shin (2010) and Shleifer and Vishny (2010) linking balance shee expansion o mark-o-marke risks and hence ime-varying financial fragiliy In oher words, hey build in a risk-aking channel where banks ake on excessive risks when R low Should he moneary policy oolbox o be expanded o include regulaory policies? Good quesion! They cas he problem in erms of nimble and clumsy policymakers i.e. ime dimension fricions
Wha s Missing? Fuure Research Top 3 Lis on Srucure of Economy 1) Sronger microfoundaions eg bankrupcies ha help moivae he exisence of banks, spreads and a financial sabiliy nexus (Goodhar, 2008); firm balance shee and financing fricion (Gerler e al) along wih zombie firms and evergreening? 2) Risk appeie and non-bank funding 3) The inernaional spillover dimension Wha s Missing? Fuure Research Top 3 Lis on he Policy Side 1) How do fiscal and FX policies figure in? 2) How do cenral bank balance shees figure in? 3) Vis-a-vis capial flows, wha abou capial conrols?
Sae Dependence And Policy Tool Analyics In my own work on boom-bus behavior, sae dependence is key when calculaing hypoheical losses and gains Conjecure: he greaer he differences beween boom and bus periods, he greaer he complemenariy of moneary policy and macroprudenial ools ie less subsiuabiliy In oher words, macroprudenial for boom/bus dimensions (low frequency); macro ools for demand managemen (high frequency) Leaves open he quesion of wha o do if macroprudenial auhoriies ge i wrong Lessons From Crises Oupu variance Inflaion variance Inflaion variance Macroprudenial is abou he shif; MP is abou radeoff
Conclusions Research-wise: imporan paper I agree wih auhors ha we need o inegrae convenional moneary policy models wih new hinking abou financial insabiliy learn in he crisis Beer microfoundaions are called for Need o consider a full range of policy ools when assessing he value-added of macroprudenial ools aking accoun of high versus low frequency seings We can reurn o business as usual bu no quie sure wha he new normal will be eiher Thank you