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Macroprudential Policy: Case Study from a Tabletop Exercise

Author

Listed:
  • Adrian, Tobias

    (International Monetary Fund)

  • de Fontnouvelle, Patrick

    () (Federal Reserve Bank of Boston)

  • Yang, Emily

    (Federal Reserve Bank of New York)

  • Zlate, Andrei

    () (Federal Reserve Bank of Boston)

Abstract

Since the global financial crisis of 2007-09, policy makers and academics around the world have advocated the use of prudential tools for macroprudential purposes. This paper presents a macroprudential tabletop exercise that aimed at confronting Federal Reserve Bank presidents with a plausible, albeit hypothetical, macro-financial scenario that would lend itself to macroprudential considerations. In the tabletop exercise, the primary macroprudential objective was to reduce the likelihood and severity of possible future financial disruptions associated with the hypothetical overheating scenario. The scenario provided a path for key macroeconomic and financial variables, which were assumed to be observed through 2016:Q4, as well as the corresponding hypothetical projections for the interval from 2017:Q1 to 2018:Q4. Prudential tools under consideration included capital-based tools such as leverage ratios, countercyclical capital buffers, and sectoral capital requirements; liquidity-based tools such as liquidity coverage and net stable funding ratios; credit-based tools such as caps on loan-to-value ratios and margins; capital and liquidity stress testing; as well as supervisory guidance and moral suasion. In addition, participants were asked to consider using monetary policy tools for financial stability purposes. Under the hypothetical scenario, participants found many prudential tools less attractive due to implementation lags and limited scope of application and favored those deemed to pose fewer implementation challenges, such as stress testing, margins on repo funding, and guidance. Also, monetary policy came more quickly to the fore as a financial stability tool than might have been thought before the exercise. The tabletop exercise abstracted from governance issues within the Federal Reserve System, focusing instead on economic mechanisms of alternative tools.

Suggested Citation

  • Adrian, Tobias & de Fontnouvelle, Patrick & Yang, Emily & Zlate, Andrei, 2015. "Macroprudential Policy: Case Study from a Tabletop Exercise," Risk and Policy Analysis Unit Working Paper RPA 15-1, Federal Reserve Bank of Boston, revised 01 Dec 2015.
  • Handle: RePEc:fip:fedbqu:rpa15-1
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    References listed on IDEAS

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    1. Beverly Hirtle & Til Schuermann & Kevin J. Stiroh, 2009. "Macroprudential supervision of financial institutions: lessons from the SCAP," Staff Reports 409, Federal Reserve Bank of New York.
    2. Akinci, Ozge & Olmstead-Rumsey, Jane, 2015. "How Effective are Macroprudential Policies? An Empirical Investigation," International Finance Discussion Papers 1136, Board of Governors of the Federal Reserve System (U.S.).
    3. Roland I. Robinson, 1950. "A New Supervisory View Of Bank Capital," Journal of Finance, American Finance Association, vol. 5(1), pages 95-109, March.
    4. Samuel G. Hanson & Anil K. Kashyap & Jeremy C. Stein, 2011. "A Macroprudential Approach to Financial Regulation," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 3-28, Winter.
    5. Boneva, Lena & Harrison, Richard & Waldron, Matt, 2015. "Threshold-based forward guidance: hedging the zero bound," Bank of England working papers 561, Bank of England.
    6. Englund, Peter, 1999. "The Swedish Banking Crisis: Roots and Consequences," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 80-97, Autumn.
    7. G. L. Bach, 1949. "Bank Supervision, Monetary Policy, And Governmental Reorganization," Journal of Finance, American Finance Association, vol. 4(4), pages 269-285, December.
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    Cited by:

    1. François Gourio & Anil K. Kashyap & Jae W. Sim, 2018. "The Trade offs in Leaning Against the Wind," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 66(1), pages 70-115, March.
    2. repec:eee:jmacro:v:54:y:2017:i:pb:p:187-207 is not listed on IDEAS
    3. Verona, Fabio & Martins, Manuel M.F. & Drumond, Inês, 2017. "Financial shocks, financial stability, and optimal Taylor rules," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 187-207.
    4. Aikman, David & Bridges, Jonathan & Kashyap, Anil & Siergert, Caspar, 2018. "Would macroprudential regulation have prevented the last crisis?," Bank of England working papers 747, Bank of England.

    More about this item

    Keywords

    Financial stability; macroprudential policy; monetary policy; financial overheating; tabletop exercise;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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