Macroprudential policy tools and frameworks

March 2011

The financial crisis has intensified the official sector's interest in strengthening the macroprudential orientation of current policy arrangements. At their meeting in Seoul in November 2010, G20 Leaders concluded that further work on macroprudential frameworks was a priority (see paragraph 41 of the Seoul Summit Document):

Further work on macro-prudential policy frameworks: In order to deal with systemic risks in the financial sector in a comprehensive manner and on an ongoing basis, we called on the FSB, IMF and BIS to do further work on macro-prudential policy frameworks, including tools to mitigate the impact of excessive capital flows, and update our Finance Ministers and Central Bank Governors at their next meeting. These frameworks should take into account national and regional arrangements. We look 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 update summarises the work underway internationally and nationally to develop effective macroprudential policies and frameworks, by drawing also on surveys conducted by the BIS (via the CGFS) and IMF. These efforts include regulatory reforms and the design of policy tools to strengthen the resilience of the financial system, as well as efforts at the national and regional level to develop fully-fledged macroprudential policy frameworks. An Annex discusses issues related to managing capital flows.

This note finds that major steps have already been taken. That said, further work is needed to address the remaining challenges in successfully implementing macroprudential policies and institutional frameworks, including:

  • Design and collection of better information and data to support systemic risk identification and modelling;
  • Design of techniques to identify and measure systemic risk that utilise this information and help inform the design of policies;
  • Design of an effective macroprudential toolkit of powers and instruments, including the criteria for the choice and calibration of the instruments and methods to assess their effectiveness, as well as the respective merits of rules versus discretion; and
  • Design of appropriate governance arrangements for the exercise of the macroprudential policy powers.

The FSB, BIS and IMF will provide an update on progresses in these areas to G20 Leaders at their November meeting.