Comments to Macroprudential policy over the business cycle Enrique Alberola BE-WB Conference Debt and credit, growth and crisis Banco de España, Madrid

2 Intro  Paper is a very relevant contribution….  Cyclicality of reserve requirements (in a GDP sense) Implicitly assuming stabilization properties  Complementarity with monetary policy (interest rate movements)  …to the core issues of an ongoing policy debate OUTLOOK Environment of financial instability, capital flows volatility Slow reaction of monetary policy to the cycle (in particular to the upward phase) Can it be explained by alternative tools, v.g. Reserve requirements LONG TERM Shifting paradigms in central banks Links between monetary policy and financial stability (macroprudential policy)  Comments aimed at clarification and further research  On semantics and beyond  On symmetry and effectiveness

3 On semantics. Reserve requirements as macroprudential policy  Definitions of macroprudential policy:  This paper: “ The use of prudential tools,… for macroeconomic stabilization purposes” As opposed to the dicotomy macro/micro approach: “The use of prudential tools with the explicit objective of promoting the stability of the financial system as a whole, not of the individual institutions” BIS (2010) “The prime objective of macroprudential policy is to limit build-up of system-wide (systemic) financial risk” IMF (2011)  The main objective of the paper:  Compare reserve requirements movements and monetary policy movements  Analyse complementarity or substitution

4 On semantics. Reserve requirements as macroprudential policy  Therefore: Reserve requirements  Interest rates Reserve requirements = Macroprudential tool Overstretching the macroprudential concept Is this an innocuous semantic question?. Not at all Central banks frameworks are under reconstruction, and these imprecisions lead to confusionCentral banks frameworks are under reconstruction, and these imprecisions lead to confusion Reserve requirements can be complementary because they are embedded in the monetary transmission mechanism, via multiplier. Reserve requirements as alternative monetary policy tool, with some macroprudential (v.g. financial stability) impact Interest rate movements ARE a Macroprudential tool?

5 5 Price stability Micro prudential Micro prudential interest rates interest rates Regulation & supervisión MONETARY POLICY REGULATION & SUPERVISION Fitting macroprudential policy. Advanced economies Macroprudential Policy Macroprudential Policy Financial Stability goals instruments On semantics. Reserve requirements as macroprudential policy

6 6 Price stability Micro prudential Micro prudential Regulation & supervisión MONETARY POLICY REGULATION & SUPERVISION Fitting Macroprudential policy. Emerging Macroprudential Policy Macroprudential Policy Financial Stability goals instruments The shifting setting for central banks interest rates interest rates LTV caps K requirements Liquidity ratios Dynamic provisions Reserve requirements back

7 On further work. The empirical link between RR and interest rates  Use database to determine empirical relation between RR and interest rates  Some empirical evidence: China: 2:1; Peru 1:1 Brazil 0,75:1  Gª Escribano & Tovar (2012) analyse impact of reserves, but do not analyse symmetries

8 On further work. The empirical link between RR and interest rates  Use database to determine relations between RR and interest rates  Some empirical evidence China: 2:1; Peru 1:1 Brazil 0,75:1  Gª Escribano & Tovar (2012) analyse impact of reserves, but do not analyse symmetries

9 On further work. The empirical link between RR and interest rates  Symmetry  Downside: fear of falling  Upside: fear of capital inflows  With the same strength? Is now more prominent the latter?  …compare both cycles

10 Final considerations Large policy implications, large pending exploitation Be careful when conveying the messages Should help to clarify the roadmap not to add confusion RR and financial deepening Some years ago substantial reserve requirements associated with underdeveloped banking system, bound to vanish Entailed costs (banking tax, financial distortions…) What is the view now, given its proven utility? Would its resilience limit banking deepening