Macroprudentialism

A new Vox eBook Dirk Schoenmaker Duisenberg school of finance 15 December 2014

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Overview

1.  Why macroprudentialism?

2.  Two pillars

3.  What objectives?

4.  European coordination

5.  More of an art than a science!

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Why?

•  Currently: low interest rates, but risk of (housing) bubbles

•  Before crisis: Ø  Monetary policy: inflation of consumption goods, but

not inflated asset prices Ø  Microprudential: individual institutions, with models

assuming exogeneous risk

•  Macropru missing link: need to look at financial system as a whole + endogeneous feedback loops

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Policy framework

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Two pillars

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What objectives?

•  On the cyclical (time-series) dimension: Ø  Just increasing resilience of financial system against

financial shocks (Borio); or Ø  Stabilising credit cycle (Gersbach and Rochet)

•  On the structural (cross-sectional) dimension: Ø Capital surcharges for systemic banks to reduce TBTF Ø But how high?

•  Scope: banking, or also securities, insurance and pensions?

Financial cycle is strong!

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Monetary vs Macroprudential

•  Tinbergen: two objectives – two instruments:

Ø  Yes, Goodhart and Tucker: macropru more targeted at particular risks (e.g. housing/property); or

Ø  No, Borio: interest rates also needed for risk-taking channel

Ø  Middleground, Portes: sometimes need to struck compromise

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Macro vs micro prudential

•  Different perspective / orientation: Ø  Borio: Macro lens towards prudential rules Ø  Operational: when designing prudential rules, choose the

macro least damaging

•  Hierarchy of objectives: Ø Tucker and Dirks et al: macro should come first Ø But be careful for forbearance (delaying necessary action)

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Hierarchy of objectives

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Figure 2. Hierarchy of objectives

Source: Kremers and Schoenmaker (2014) 4. Emerging arrangements in the European Union As mentioned in the introduction, both a 2012 ESRB recommendation (ref. ESRB/2011/3) and the EU Capital Requirements Regulation (CRR, Regulation No 575/2013) required EU Member States to set up a ‘designated authority’ for macro-prudential supervision. The ESRB has completed a review of the (likely) designated authorities (IWG WP/2013/011). From this review, we distil four main institutional models where the formal powers for macro-prudential supervision are located:

1. the ministry of finance (or economics);

2. the central bank;

3. the financial authority;

4. an “ad-hoc” committee. Table 2 shows that the central bank has most often been designated as the responsible authority (see Table 3 in the annex for a breakdown at country level). While several European central banks combine monetary policy and supervisory tasks, they typically have separate departments for financial stability (macro-prudential) and financial supervision (micro-prudential). In these cases, there is an organisational separation between the macro- and micro-prudential tasks. In some countries, the stand-alone financial authority has been designated for macro-prudential policy.

Monetary stability

Financial stability: macro-prudential

Financial soundness: micro-prudential

Level

Economy

Individual institutions

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Objectives

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Eurozone

•  Monetary and Banking Union: Ø  Centralised monetary policy Ø  Centralised banking supervision (micro prudential) Ø  But decentralised macroprudential supervision

•  Is that all right? Ø Sapir and Acharya/Calomiris: need for centralised macro

prudential supervision by ECB (together with national) Ø With differentiated implementation as financial cycle differs

across countries

Eurozone

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Concluding

•  Need for analytical framework / model: Ø  Difficult because externalities are multifacetted and

endogeneous feedback loops Ø  Be aware of unintended consequences

•  But we need to get into action: Ø Macroprudentialism is more art than science Ø Democratic accountability important because of impact

on citizens

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Download

•  Download the Vox eBook on macroprudentialism: http://www.voxeu.org/article/macroprudentialism-new-vox-ebook

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