Macroprudential policy: could it have been different this time?

Speech by Mr Jaime Caruana, General Manager of the BIS, at the People's Bank of China seminar on macroprudential policy, in cooperation with the International Monetary Fund, Shanghai, 18 October 2010.

Basel III provides a solid foundation for a macroprudential framework. Could the new standards have made a difference in the course of the recent financial crisis? A counterfactual empirical analysis suggests that this would indeed have been the case. Banks would have faced the crisis with much stronger capital bases, and would have been better able to draw on them. The financial system would have been much better prepared to withstand the shock of falling housing prices and losses on securitised assets. As a result, the negative feedback from losses to credit supply would have been milder, and governments would have had to provide less support. The aggravation of the business cycle due to the financial system distress would have been significantly reduced. While Basel III brings macroprudential policy into the mainstream of financial supervision, it remains the responsibility of national authorities to put it into practice.

Presentation slides (PDF, 10 pages, 673 kb)