Macroprudential policy and financial stability, role and tools

Macroprudential Policy: Case Study from a Tabletop Exercise

After the global financial crisis of 2007, macroprudential policy instruments have gained in recognition as a crucial tool for enhancing financial stability. Monetary policy, fiscal policy, and microprudential policy operate with a different toolkit and focus on achieving goals other than the stability of the financial system as a whole. In ligh of this, a fourth policy – namely macroprudential policy – is required to mitigate and prevent shocks that could destabilize the financial system as a whole and compromise financial stability. The aim of this paper is to contrast macroprudential policy with other economic policies and explain why other economic policies are unable to attain financial stability, which in turn justifies the need for a separate macroprudential policy, the ultimate goal whereof is precisely financial stability of the financial system as a whole. Our research results based on the descriptive research method indicate that, in order to prevent future financial crises, it is indispensable to combine both the microprudential and the macroprudential approach to financial stability. This is because the causes of the crises are often such that they cannot be prevented or mitigated by relying only on microprudential or only on macroprudential policy instruments.

Monetary and macroprudential policy in a commodity exporting economy: A structural model analysis

This study focuses on identifying potential triggers for the development of the banking sector based on systemic risk indicators within macroprudential policy, examining its transmission through new channels as an effective method for maintaining financial stability in Russia's banking sector. An analysis using composite financial stress indices indicates that the state of the financial market in early to mid-2024, as assessed by ACRA ratings and the Bank of Russia, was under threat due to rising mortgage and consumer lending. These areas were in a heightened state of instability due to non-market funding mechanisms and a series of external shocks. The study aims to develop a forecast for identifying new financial market triggers and regulatory adjustments for 2025 by modernizing macroprudential policy tools. The hypothesis of the study is grounded in the urgent need to implement strict prudential measures to mitigate systemic risk, given the inefficacy of monetary policy and the growing risk of productivity loss in the real sector amid increasing debt burdens and the absence of government support. A forecast of the banking sector and economic production under current market conditions is provided, along with an assessment of the effectiveness of new macroprudential policy tools in achieving financial stability. The study analyzes the impact of new measures on commercial banks and conducts a macroeconomic assessment of Russia's economy and credit market to identify key destabilizing factors in the financial sector. Additionally, it proposes directions for refining specific macroprudential tools and procedures.

Monetary Policy, Macroprudential Policy, and Financial Stability

This paper studies the impacts of fiscal policy, macroprudential policy as well as their interaction on financial stability in Vietnam during the global economic crisis 2008–2009. Using Structural Equation Modeling (SEM), the study shows that both fiscal policy and macroprudential policy have a great impact on the financial stability. In particular, fiscal policy has a negative impact while macroprudential policy shows a positive effect on the financial stability in Vietnam. Besides, evidences that indicate a negative relation between the fiscal policy and macroprudential policy in Vietnam are also implied in the study’s outcomes. With those results, the authors come to conclusion that Vietnam should execute macroeconomic policies, especially the fiscal policy and macroprudential policy, with caution and consideration of their interaction in order to take the best advantage of their coordination towards financial stability.

Interaction between monetary and macroprudential policies

This paper develops a calibrated dynamic stochastic general equilibrium model incorporating a banking sector and some unique features of China’s macroeconomic policies to simulate China’s monetary and macroprudential policies. The quantitative results show, first, that the interest rate is a better instrument for China’s monetary policy than the required reserve ratio (RRR) when the central bank is solely concerned about price stability; second, that the loan-to-value ratio is a very useful macroprudential tool for China’s financial stability, and the RRR could be used as an instrument for both objectives; third, monetary and macroprudential policies could be either complements or substitutes in China, depending on the choices of instruments for the two policies. Our policy experiments recommend three combination choices of instruments for China’s monetary and macroprudential policies. (JEL codes: E52, E61and G18)

The severity and longevity of the recession caused by the 2007 financial crisis has highlighted the lack of a reliable macro-based financial regulation framework. As a consequence, addressing the link between the stability of the financial system as a whole and the performance of the overall economy has become a mandate for policymakers and scholars. Many countries have adopted macroprudential tools as policy responses for safeguarding the financial system. This paper provides a literature review of macroprudential policies, its objectives and the challenges that a macro-based framework needs to overcome, such as financial stability, procyclicality, and systemic risk.

<div class="page" title="Page 1"><div class="layoutArea"><div class="column"><p><span>The economics literature related to the financial system seeks to define the concepts of financial stability, systemic risk and macroprudential instruments for the purpose of drafting a policy that essentially "leans against the wind", that is, a policy that monitors macroeconomic vulnerabilities and combats system instability. Such a policy should cover all financial institutions involved in credit intermediation (not just banks) and consider the pro-cyclical and intrinsic nature of risk in the financial system, and account for the spillovers effects of policies in other countries, that is, the global context. This article summarizes the main concepts related to macroprudential policy discussed in the economics literature after the crisis the 2008 financial crisis. In addition, we describe macroprudential policy in the context of the Brazilian financial system, specifically major policies implemented in the banking regulatory environment related to Basel III and non-bank regulations related to shadow banks. After the 2008 crisis, Brazil was one of the precursors countries in operating macroprudential instruments to curb excessive credit growth and strong capital inflows. The Brazilian financial system has a broad regulatory perimeter, adhering to international standards and covering the Shadow banking system. This system has a weak connection with the banking system and is small relative to the financial assets of the national and global systems. </span></p></div></div></div>

The financial crisis has generated fundamental reforms in the financial regulatory system in the U.S. and internationally. Much of this reform was in direct response to the weaknesses revealed in the precrisis system. The new ?macroprudential? approach to financial regulations focuses on risks arising in financial markets broadly, as well as the potential impact on the financial system that may arise from financial distress at systemically important financial institutions. Systemic risk is the key factor in financial stability, but our current understanding of systemic risk is rather limited. While the goal of using regulation to maintain financial stability is clear, it is not obvious how to design an effective regulatory framework that achieves the financial stability objective while also promoting financial innovations. This paper discusses academic research and expert opinions on this vital subject of financial stability and regulatory reforms. Specifically, among other issues, it discusses the impact of increasing public disclosure of supervisory information, the effectiveness of bank stress testing as a tool to enhance financial stability, whether the financial crisis was caused by too big to fail (TBTF), and whether the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) resolution regime would be effective in achieving financial stability and ending TBTF.

This study aims to analyze the ability of three government policies and the strong impact of COVID-19 on the economic recession in seven emerging market countries (China, India, Indonesia, Russia, Brazil, Turkey, and Egypt). T-test and independent-sample t-test. This study resulted in the findings of the ARDL Panel model, proving that the leading indicators of state-based financial system stability are China, India, and Brazil. In contrast, the order of the top policy indicators of policy/variable financial system stability is fiscal policy (GOV), monetary policy (I.R.), and policy macroprudential (NPL). The leading indicators of state-based economic stability are Indonesia and Russia. In contrast, the order of leading indicators of policy/variable-based economic stability is macroprudential policy (LDR), fiscal policy (Tax), and monetary policy (JUB). During the Covid-19 pandemic, the effectiveness of financial system stability, apart from China, all countries experienced economic instability. On economic stability, apart from China and Turkey, all countries experienced economic instability after the Covid-19 Pandemic. Recommendation: the policies needed to control financial system stability focus on macroprudential policies and fiscal policies. In contrast, the effectiveness of the procedures necessary to maintain economic stability is through macroprudential policies.

Financial stability is a crucial indicator of the financial sector's health, reflecting the system's resilience or vulnerability to crises. This study investigates the impact of macroeconomic variables and financial inclusion on financial stability in Indonesia, utilizing quarterly data from the first quarter of 2012 to the fourth quarter of 2021. Employing the Vector Error Correction Model (VECM), the research examines the influences of these factors in both the short and long term. The findings reveal that macroeconomic variables and financial inclusion significantly affect financial stability in Indonesia across both time frames. Specifically, inflation emerges as a critical factor influencing financial stability in the long term, while interest rates play a pivotal role in the short term. Moreover, financial inclusion, represented by the public's use of banking products and third-party funds relative to Gross Domestic Product (GDP), impacts financial stability both in the long and short term. Conversely, financial inclusion, measured by credit to GDP, exhibits only short-term effects on financial stability. The results underscore the importance of careful consideration by the central bank when formulating monetary policy, particularly regarding interest rate adjustments, due to their immediate impact on financial system stability. Over the long term, maintaining control over inflation rates is imperative to safeguard financial stability. Furthermore, financial institutions, in their role of fostering financial inclusion by distributing credit, must balance the quality of credit with its quantity to avoid negative impacts on the financial system's stability. This study contributes valuable insights for policymakers and financial institutions aiming to bolster Indonesia's financial stability through prudent macroeconomic management and the strategic implementation of financial inclusion initiatives.

The article provides a comprehensive analysis of the problem of international macroprudential regulation from the standpoint of benefits and threats produced for national economies in the process of its implementation. It has been established that the macroeconomic situation in each individual country is increasingly being influenced by forces that go beyond both traditional cycle theories and the conventional understanding of non-economic factors. As a result, long-term macroeconomic stability, the key to which is the stability of the national financial and, above all, the banking system, to external shocks, is called into question, and the main way to ensure it is to conduct a risk-weighted macroprudential policy. Capital inflows driven by changes in financial regulations in the country of origin of capital could lead to excessive credit growth and asset price pressures in capital recipient countries, which could be partly mitigated by regulatory and macroeconomic policies in those countries. Conversely, effective domestic macroprudential policies that help contain systemic risks in one country can contribute to financial stability in other countries by generating positive externalities. Reducing the likelihood of a financial crisis in one country through timely macroprudential policies can reduce the scale of negative trade and financial spillovers or spillovers at the regional or international level. Based on the assumption that, when policymaking is inconsistent, each country's regulator is free to choose policy instruments to minimize its own political losses or maximize public welfare, assuming that regulators in other countries can make similar arbitrary choices of macroprudential instruments as a given, it has been found that such policy, generally does not take full account of cross-border spillovers, that is, the real and financial externalities caused by domestic shocks, or the consequences of national policy responses to those shocks. The article determines that, theoretically, international coordination of macroprudential policies can achieve a reduction in political losses or contribute to an increase in public welfare. Both domestic macroprudential policies and prudential capital controls produce spillover effects internationally, which can lead to “capital wars” based on races to lower interest rates. Keywords: macroprudential policy, international economic policy, international capital flows, financial integration, international policy coordination, global instability, regulatory wars.

Purpose: The purpose of this paper is to critique the suitability of macro prudential policy as a proactive and effective toolkit for mitigating financial system risk in developing economies.Design/methodology/approach: The author first discusses the causes of the 2007/2008 global financial crisis in developed and developing economies. The narration is to demonstrate that the causes, duration and amplitude of the crisis differ across jurisdictions, and any regulatory model that will be effective in mitigating future crises must take into cognizance the institutional peculiarities of those countries. Findings: The paper provides evidence on the difficulties of implementing the macro-prudential policy toolkits in developing economies because of their institutional and structural characteristics such as inflationary pressure, undiversified economy, lagging supervision, among others.Research Limitations/implication: There is paucity of substantial local literature on macro-prudential policy in developing economies, especially Africa. While this study is meant to close this gap, literature reviewed however, relied extensively on studies on developed economies. Practical implication: The extrapolation of prudential tools from developed economies requires serious caution by developing economies because of dissimilarities in economic structure, financial system, governance structure and causes of systemic risk, which may not be mitigated by macro-prudential toolkits.Originality and Value: The study adds value to the global discourse on regulatory models for mitigating systemic crisis by introducing the perspective of developing economies to the macro-prudential debate.