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

2/12 What is macroprudential policy? Definition: Prudential policy with a system-wide perspective

3/12 What is macroprudential policy? Definition: Prudential policy with a system-wide perspective Microprudential: Address the risk of individual bank failure

4/12 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

5/12 Outline 1.Concepts and objectives 2.Metrics and tools 3.Road ahead 4.Questions and hazards

6/12 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

7/12 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

8/12 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

9/12 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….

10/12 Road ahead Systemically important financial institutions (SIFIs) Improved resolution regimes Regulatory perimeter and shadow banking system Data gaps

11/12 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

12/12 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