Motivating the Use of Different Macro-prudential Instruments: the Countercyclical Capital Buffer vs. Borrower-Based Measures

In the implementation of macro-prudential policy, macro-prudential authorities such as the Central Bank of Ireland face policy choices as to how best to mitigate systemic risk(s). This Letter focuses on one such policy choice. The Letter conceptually assesses a capital-based tool (the countercyclical capital buffer) compared with borrower-based instruments (e.g. loan-to-value and loan-to-income restrictions). The Letter also briefly reviews the implementation of these tools across Europe. It is found that at a high level the countercyclical capital buffer tends to be viewed as best suited, although not limited, to enhancing the resilience of the banking system. Borrower-based measures, then, provide a tool that can be used to target the resilience of households or impact directly on the flow of mortgage lending. These instruments are flexible however and policymakers can tailor their implementation, either individually or in combination, to ensure an appropriate macro-prudential policy stance with respect to the prevailing systemic risk environment.