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

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

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

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
4/12

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

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
6/12

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
7/12

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
8/12

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….
9/12

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

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
11/12

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
12/12