Policemen outside the Bank of England: the U.K. has implemented policies to keep its financial system safe (photo: Simon Dawson/Bloomberg)

Policies to Prevent Crises on the Rise

by Erlend Nier

Monetary and Capital Markets Department

September 20, 2016

  • Countries increasingly use macroprudential policies to reduce risk of crises
  • New paper takes stock, draws lessons
  • IMF providing advice to countries

Since the global financial crisis of 2008, a growing number of countries—both emerging and advanced economies—are turning to macroprudential policies in order to contain risks to the financial system as a whole. Macroprudential policy uses primarily regulatory tools. Countries can use them both to increase the resilience of the financial system to shocks, and “lean against” a renewed build-up of risks, which could jeopardize the functioning of the financial system as a whole.

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Initially pioneered by emerging market economies—such as Korea and Hong Kong SAR—the use of macroprudential policy tools is now common also among advanced economies, including the United States and Europe. These countries are increasingly using a broad range of tools, including requirements for cash on hand and capital, as well as loan restrictions, such as caps on loan-to-value and debt-to-income ratios, to address a range of potential systemic vulnerabilities (see figures).

macroprudential chart

IMF-FSB-BIS paper for the Group of Twenty examines country experiences and lessons

A new paper for the Group of Twenty Advanced and Emerging Economies examines the experience that has been gained and draws out lessons. The paper was 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.

The paper finds that countries need to set up an ongoing process that translates an assessment of the risks to the financial system to policy actions to contain these risks. This 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.

    In practice, all of these elements will tend to be considered jointly, rather than in sequence. The new paper examines the experience with each of them.

Advice to countries

The IMF provides country-specific advice on macroprudential policy issues through its Financial Sector Assessment Program, as well as its regular check-ups on countries’ economies, known as surveillance.

Since the global financial crisis, the Financial Sector Assessment Program has become mandatory for countries with systemically important financial systems, and the IMF has more recently issued a Guidance Note on Macroprudential Policy in order to guide the staff’s analysis.

Based on this document, the financial assessments now typically provide an in-depth assessment of macroprudential policy settings and institutional arrangements in countries, such as the United States, the United Kingdom, and Ireland.  Surveillance conducted through the IMF’s annual assessments of a country’s economy, likewise, increasingly provide advice on these issues.

The goal is to help strengthen member countries’ willingness and ability to use macroprudential policy tools, with the aim ultimately to reduce the frequency and severity of financial crises around the world.