Policies to Prevent Crises on the Rise

IMF News, September 20, 2016

Source details

Publication date: September 20, 2016
Author: Erlend Nier, Monetary and Capital Markets Department
Core message: Since the global financial crisis of 2008, a growing number of countries—both emerging and advanced economies—are turning to macroprudential policies to contain system-wide financial risk and either increase resilience or “lean against” a renewed build-up of risks.

Initially pioneered by emerging market economies such as Korea and Hong Kong SAR.
Now common in advanced economies, including the United States and Europe.
Common macroprudential tools cited:
- requirements for cash on hand and capital
- loan restrictions, such as caps on loan-to-value and debt-to-income ratios

Produced jointly by the International Monetary Fund, the Financial Stability Board, and the Bank for International Settlements for the G20 leaders’ summit in Hangzhou, China.
Main finding: countries need an ongoing process that translates risk assessment into policy actions to contain systemic risks.
The process involves five key steps:
- designing the policy response in a manner that targets well-identified risks while avoiding unnecessary costs;
- assessing and addressing the potential for circumvention of macroprudential tools;
- evaluating ex post the impact of macroprudential intervention and re-considering the selection and design of tools;
- considering the potential for macroprudential tools to be relaxed;
- improving the information base for macroprudential policy across all areas noted above.
Note: In practice, these elements are typically considered jointly rather than sequentially.

IMF provides country-specific advice on macroprudential policy through:
- the Financial Sector Assessment Program (FSAP)
- regular surveillance of countries’ economies (annual assessments)
Since the global financial crisis, the FSAP has become mandatory for countries with systemically important financial systems.
The IMF has issued a Guidance Note on Macroprudential Policy to guide staff analysis.
Financial assessments now typically provide in-depth assessments of macroprudential policy settings and institutional arrangements in countries such as the United States, the United Kingdom, and Ireland.
Surveillance (annual assessments) increasingly provides advice on macroprudential issues.

Strengthen member countries’ willingness and ability to use macroprudential policy tools with the aim of reducing the frequency and severity of financial crises worldwide.

Source: Policies to Prevent Crises on the Rise (IMF News, September 20, 2016).