Macroprudential policy: from theory to implementation

The crisis has demonstrated the need to renew our approach to financial system regulation and notably to complement it with a macroprudential perspective. There is no single definition of what constitutes “macroprudential” policy. There is, however, some consensus over its broad outlines. First, it involves adding a macroeconomic perspective to the supervision of the financial system, which up till now has only really been addressed from a “micro” standpoint. As the crisis has shown, financial stability does not depend solely on the soundness of the individual components that make up the financial system; it also depends on complex interactions and interdependencies between these components. Moreover, the term “macro” refers to the interactions between the real world and the financial world, to the extent that a risk only becomes “systemic” once the imbalances or shocks affecting the financial system pose a significant threat to economic activity. The second characteristic of macroprudential policy is that it is preventive.1 Its aim is precisely to prevent the formation of financial imbalances, procyclical phenomena or systemic risks by limiting excessive growth in credit and in economic agents’ debt levels, and increasing the shock-absorbing capacity of financial institutions or structures ex ante.2 Therefore, macroprudential policy is not designed to manage financial crises directly once they have erupted, but rather to prevent them from happening in the first place. The implementation of macroprudential policy poses a number of major challenges, particularly as many countries have only just put in place the necessary operational frameworks. In Europe, for instance, the CRD IV/CRR3 banking regulation package only came into force on 1 January 2014, while the Single Supervisory Mechanism (SSM) is due to become effective in November. The two texts, CRD IV and CRR, list the macroprudential tools that national authorities can use. If deemed necessary, these tools can in turn be tightened by the European Central Bank (ECB), which also has macroprudential responsibilities in addition to its microprudential role. Experience and analysis have shown that the successful implementation of macroprudential policy depends on three key factors: • the governance of that policy; • the identification of market failures and the selection of tools to combat them; • a proper understanding of the channels of transmission and of the way these tools interact with other economic policies, notably monetary, fiscal and microprudential policies.