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Macroprudential policy: case study from a tabletop exercise

Listed author(s):
  • Adrian, Tobias

    (Federal Reserve Bank of New York)

  • de Fontnouvelle, Patrick

    (Federal Reserve Bank of Boston)

  • Yang, Emily

    (Federal Reserve Bank of New York)

  • Zlate, Andrei

    (Federal Reserve Bank of Boston)

Since the global financial crisis of 2007-09, policymakers 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; and 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 owing 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.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 742.

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Length: 42 pages
Date of creation: 01 Sep 2015
Date of revision: 01 Dec 2015
Handle: RePEc:fip:fednsr:742
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  1. 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.
  2. 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.
  3. G. L. Bach, 1949. "Bank Supervision, Monetary Policy, And Governmental Reorganization," Journal of Finance, American Finance Association, vol. 4(4), pages 269-285, December.
  4. 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.).
  5. Boneva, Lena & Harrison, Richard & Waldron, Matt, 2017. "Threshold-based forward guidance: hedging the zero bound," CEPR Discussion Papers 11749, C.E.P.R. Discussion Papers.
  6. Roland I. Robinson, 1950. "A New Supervisory View Of Bank Capital," Journal of Finance, American Finance Association, vol. 5(1), pages 95-109, 03.
  7. 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.
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