Avoiding "regulatory wars" using international coordination of macroprudential policies

Article by Mr Luiz Awazu Pereira da Silva, Deputy General Manager of the BIS, and Mr Michael Chui, Senior Economist, based on panel remarks at the Seminar on Financial Volatility and Foreign Exchange Intervention: Challenges for Central Banks, jointly organised by the Inter-American Development Bank and the Central Reserve Bank of Peru, Cusco, 25-26 July 2017.

Financial spillovers and spillbacks have increased significantly in magnitude since the Global Financial Crisis posing a threat to financial stability. Using macroprudential policies following systematic countercyclical rules reduces volatility and contributes to financial stability, growth and investment. However, a multiplication of non-systematic, local macroprudential policies, and capital flow management measures including more aggressive capital controls, might result in a "regulatory war" and reduce global welfare. Instead, other avenues could be explored, as demonstrated by the adaptability of the policy frameworks used by emerging market economies. They have constantly evolved as a result of lessons learned from crises and that should include the Global Financial Crisis. This evolution is part of a learning curve that uses past crisis experiences, policymaking and research to prevent vulnerabilities from developing into full-blown future crises. These remarks are meant to show how this process occurs, its importance for global stability and a last but much needed "new lesson". Global financial stability needs international coordination on macroprudential policies between major emerging market economies (those that represent a large combined share of the global economy) and the major advanced economies.