Remarks on "Enhancing financial stability and resilience: macroprudential policy, tools and systems for the future"
Remarks by Mr Jaime Caruana, General Manager of the BIS, at the press launch of a report "Enhancing financial stability and resilience: macroprudential policy, tools and systems for the future" by the G30 Working Group on Macroprudential Policy, Washington DC, 10 October 2010.
Let me start by saying that I am grateful for the invitation to join this Working Group, and for being given the opportunity to discuss macroprudential policy with such a distinguished group of policymakers and market practitioners. As you all know, the BIS has a long history of advocating a macroprudential approach to economic policy - something that is apparent from some of the early work on the issue cited in the report1. It is therefore good to see this idea gaining some traction, and I believe that this report will make a forceful contribution in this context.
In this spirit, there are two issues that are covered at length in the report and that I would like to single out for particular attention:
First, as apparent from the recommendations made, the report provides strong support for ongoing initiatives in the area of regulatory reform. This applies, in particular, to the recently agreed Basel III standards for bank capital and liquidity, which are going to provide a strong anchor for macroprudential policy frameworks going forward. In a nutshell, these new standards will embed in regulation the macroprudential principle of, in good times, increasing capital buffers that can be drawn down during periods of stress. This is an important step forward.
Yet, at the same time, it is also important to note that more action is needed in other areas of macroprudential policy. This includes the development of tools that are explicitly aimed at leaning against excessive credit growth. It is in this area that our knowledge is least advanced, with much of the experience to date based on measures focused on particular sectors and countries. Sectoral policies, such as higher mandated loss reserves or maximum loan-to-value ratios, can be very helpful complementary tools in a macroprudential toolkit. In using them, however, we need to be careful to avoid unintended side effects or drifting inadvertently towards credit allocation. That is, some caution is required in further developing and using these tools.
The second issue that I would like to single out is governance. The Working Group rightly emphasises the importance of strong governance arrangements for macroprudential policy. This requires ex ante clarity about the roles, responsibilities and powers of those charged with macroprudential supervision - based on mandates that safeguard operational autonomy and drawing on international cooperation. In this context, central banks have a key role to play: because of their expertise in macroeconomic analysis, their intimate knowledge of financial markets, their role as lenders (and, possibly, market-makers) of last resort, and their oversight of payment and settlement systems - but also because of the extensive hands-on experience gained with mechanisms fostering independence and accountability.
It is on this basis that I strongly recommend this report be carefully read by all those who are concerned with the topic of macroprudential policy - not only in the policymaking community, but also among market practitioners.