Macroprudential Policy Framework: A Practice Guide

Abstract

Thank you, Governor Ingves. In this panel, I would like to cover some issues concerning the establishment of a macroprudential policy framework, including its necessity and objective, macroprudential policy tools, and institutional arrangements. 1. The necessity and objective of macroprudential policy The first part is the necessity and objective of macroprudential policy. Before the global financial crisis, the primary purpose of traditional market policy was price stability, in the belief that focusing on price stability would eventually deliver financial stability. At the same time, financial supervision focused on the soundness of individual financial institutions, in the expectation that this would ultimately underpin the stability of the financial system as a whole. After the crisis, we learned that financial stability cannot be achieved by traditional monetary policy or microprudential policy alone. It is now clear that the objective of macroprudential policy is to prevent the accumulation of financial systemic risks. However, not enough research has been done on methodologies to identify and measure systemic risk factors. 2. Macroprudential policy tools Until now, the capital ratio, liquidity ratio and leverage ratio have been at the centre of our discussions on macroprudential policy tools. These are actually based upon microprudential tools with adjustments to contain potential sources of systemic risk such as procyclicality and interconnectedness. We need to develop and utilise a variety of additional policy instruments because, first, the final Basel III package is scheduled to be fully implemented by 2019 and, second, the available tools, especially capital, liquidity and leverage ratios, may be limited in their effect. Although the agreed policy tools including capital, liquidity and leverage ratios are available, central banks should still play a role in preventing financial crises and developing appropriate policy tools in times of crises. In this sense, we need further study on the effectiveness of using monetary policy as a means of promoting financial stability. In this regard, reserve requirements and loan-to-value (LTV) ratios need to be our top priority. They may be useful tools for controlling the funding and operating behaviour of financial institutions. Reserve requirements may also be used as an effective tool for controlling system liquidity if their target is expanded from bank deposits to the liabilities of financial institutions, especially wholesale funding. The LTV ratio and