In November 2010, G20 Leaders “called on the FSB, IMF and BIS to do further work on macroprudential policy frameworks, including tools to mitigate the impact of excessive capital flows, and update Finance Ministers and Central Bank Governors at their next meeting.” They noted that “these frameworks should take into account national and regional arrangements” and looked “forward to a joint report which should elaborate on the progress achieved in identification of best practices, which will be the basis for establishing in the future international principles or guidelines on the design and implementation of the frameworks.”
This report responds to this call and follows an earlier update to the G20 in February 2011. It traces the progress in implementing macroprudential policy frameworks along three broad lines: (i) advances in the identification and monitoring of systemic financial risk; (ii) the designation and calibration of instruments for macroprudential purposes; and (iii) building institutional and governance arrangements in the domestic and regional context. Given the interlinkages with other spheres of public policy, the main message of the report is that effective macroprudential frameworks require institutional arrangements and governance structures, tailored to national circumstances, that can ensure an open and frank dialogue among policymakers on policy choices that impact on systemic risk, resolve conflicts among policy objectives and instruments and mobilise the right tools to limit systemic risk.
While recognising that no one size fits all, the report explores some of the common challenges that arise in developing effective frameworks.
The report notes that although the development and implementation of macroprudential frameworks is still at an early stage, important steps have been taken, both nationally and internationally. In the area of systemic risk monitoring, efforts have focused on closing data gaps and on developing better indicators and models to assess systemic risk both within and outside the banking system (the so-called ‘shadow banking system’). There has also been progress in developing new macroprudential tools – international agreement has been reached on the introduction of countercyclical capital buffers and additional loss absorbency for global systemically important banks – and in assessing the effectiveness of existing ones. On the governance front, a number of jurisdictions have been adjusting institutional arrangements to support macroprudential policy, and international workstreams have examined key characteristics of these arrangements.
That said, the report also highlights the scope for further progress. First, the identification of systemic risk is a nascent field. No common paradigms as yet exist. Further fundamental and applied research is needed, not least to better inform the collection and analysis of data underway. Second, newly introduced tools will need to be tried out in different circumstances and their performance evaluated against expectations. Finally, many jurisdictions still lack specific institutional arrangements for the conduct of macroprudential policy and those that have recently introduced them will need to gather experience on their performance. Continue reading