Inter-agency coordination bodies and the speed of prudential policy responses to the Covid-19 pandemic

Summary

Focus

The Covid-19 pandemic threatened to disrupt bank funding and market functioning. To counter this threat, prudential policymakers provided relief by temporarily loosening prudential rules. This paper investigates whether inter-agency coordination bodies for financial stability (IABs) contributed to making such prudential responses faster.

Contribution

IABs bring together policy stakeholders in a country's financial stability domain. They typically include central banks, prudential regulators and finance ministries. By sharing information, conducting joint analysis and in some cases making policy decisions, they can reduce coordination failures among member institutions. They may also serve as devices to signal that authorities which instituted them care about the issue of financial stability. However, IABs may also exacerbate policy inaction bias as they involve several authorities and may therefore mask the inaction and obscure the accountability of a single actor. This paper empirically investigates the influence of IABs on the speed of prudential relief responses to the Covid-19 pandemic.

Findings

We find that the majority of IABs have soft powers that are limited to cross-agency sharing of data and analysis. More microprudential than macroprudential relief measures were enacted in response to Covid-19 and the presence of IABs has been associated with faster microprudential policy decision-making. Our findings indicate that when central banks are prudential regulators or chairs of inter-agency coordination bodies, microprudential policy responses are faster. Overall, IABs appear to have been useful catalysts for the deployment of microprudential tools for macroprudential purposes.

Abstract

This paper investigates whether the presence of inter-agency coordination bodies for financial stability (IABs) has been associated with faster prudential policy responses to the Covid-19 pandemic. Using econometric analysis, we provide evidence that countries with IABs have enacted microprudential measures more quickly than countries without. This is not the case for macroprudential measures for which we find that IABs have been associated with slower responses. We conclude that IABs may have been useful as catalysts for the deployment of microprudential tools for macroprudential purposes.

Keywords: central bank governance, inter-agency coordination body, financial stability council, microprudential policy, macroprudential policy, Covid-19, survival analysis.

JEL classification: D02, D78, E58