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Preventive macroprudential policy

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Author Info

  • Goodhart Charles A.E.
  • Perotti Enrico

Abstract

This piece discusses the framework for macroprudential policy in concrete terms. It raises three points. It makes a strong case for preventive tools over ex-post intervention, seeking to complement the Basel III individual buffer approach by targeting risk externalities. Next, it discusses a ladder of enforcement tools for fixed prudential standards, and possible new tools, which are more flexible. To avoid forbearance, we suggest prioritizing a timely use of low adjustment cost instruments. These can be escalated or toned down as required to nudge intermediaries towards capital and stable funding norms. We suggest combining flexible instruments with robust medium term standards, to minimize resistance to adjustment along the credit cycle, while ensuring a rapid effect on risk incentives. Flexible tools can thus help maintain the commitment to robust standards, while allowing fine tuning of the transition according to market conditions. Finally, borrowing from organization theory, this paper argues for a contingent governance framework for macroprudential councils that assigns pre-eminence to different authorities depending on the specific emergency. Specifically, we argue for: assigning to microprudential regulators' tools for the implementation of liquidity and capital ratios; to macroprudential authorities within central banks tools for aggregate liquidity risk management, including charges for unstable funding; and to fiscal authorities overall control once capital support requires fiscal means.

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File URL: http://www.rivisteweb.it/download/article/10.12831/73635
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File URL: http://www.rivisteweb.it/doi/10.12831/73635
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Bibliographic Info

Article provided by Società editrice il Mulino in its journal Journal of Financial Management, Markets and Institutions.

Volume (Year): (2013)
Issue (Month): 1 (January)
Pages: 71-85

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Handle: RePEc:mul:jdp901:doi:10.12831/73635:y:2013:i:1:p:71-85

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Related research

Keywords: Financial Stability; Bank Regulation; Macroprudential Policy; Liquidity Risk; Liquidity Charges. JEL Codes: G28; G29;

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References

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  1. Enrico Perotti & Javier Suarez, 2011. "A Pigovian Approach to Liquidity Regulation," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 3-41, December.
  2. Enrico Perotti & Javier Suarez, 2011. "A Pigovian Approach to Liquidity Regulation," Tinbergen Institute Discussion Papers 11-040/2/DSF15, Tinbergen Institute.
  3. Markus K. Brunnermeier & Gary Gorton & Arvind Krishnamurthy, 2012. "Risk Topography," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 149 - 176.
    • Markus K. Brunnermeier & Gary Gorton & Arvind Krishnamurthy, 2011. "Risk Topography," NBER Chapters, in: NBER Macroeconomics Annual 2011, Volume 26, pages 149-176 National Bureau of Economic Research, Inc.
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