Macroprudential policy and financial stability, role and tools

The aim of macroprudential policy is to ensure financial stability by avoiding the outbreak of banking crises, which have a dangerous effect on the economy. Is macroprudential policy effective in the face of banking crises and systemic risks? The macroprudential policy has received significant interest from policy-makers and researchers. A few developing countries were using macroprudential policy tools well before the 2008 financial crisis, but significant progress has been made thereafter in both emerging and industrialized economies to put in place specific institutional settings for macroprudential policy. The fundamental objective of macroprudential policy is to maintain the stability of the financial system by making it more resistant and preventing the risk build-up. The objective of this paper is to analyze the important role of macroprudential policy in ensuring overall financial stability. Since the financial crisis of 2008, macroprudential policy has been increasingly used across economies. These measures aim at smoothing financial cycles and thereby mitigating the impact on the real economy, thereby allowing monetary policy to focus on price stability and promote growth and full employment. Macroprudential policy instruments fall into two categories, depending on their purpose, namely, to prevent procyclicality or to enhance the resilience and soundness of the financial system against shocks. The first category of instruments is used to stop bubbles from forming and smooth cycles, i.e. to force the debt-equity of economic operators on an income basis to prevent unsustainable credit bubbles, or to require dynamic loss provisioning rules. The second category of macro-prudential policy is to improve the resilience to shocks, such as capital surcharges for systemic institutions or the requirement to hold liquid assets to cope with market panics, and to make the financial system less complex. Keywords: macroprudential policy, financial stability, tools and measures, systemic risks.

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Macroprudential Policy Instruments of Central Banks

Voprosy Ekonomiki ◽

10.32609/0042-8736-2012-8-32-47 ◽

2012 ◽

pp. 32-47

Author(s):

S. Andryushin ◽

V. Kuznetsova

Keyword(s):

Systemic Risk ◽

Financial Stability ◽

Financial System ◽

Policy Instruments ◽

Central Banks ◽

Macroprudential Policy ◽

Policy Studies ◽

The Future ◽

Financial Cycles

The paper analyzes central banks macroprudencial policy and its instruments. The issues of their classification, option, design and adjustment are connected with financial stability of overall financial system and its specific institutions. The macroprudencial instruments effectiveness is evaluated from the two points: how they mitigate temporal and intersectoral systemic risk development (market, credit, and operational). The future macroprudentional policy studies directions are noted to identify the instruments, which can be used to limit the financial systemdevelopment procyclicality, mitigate the credit and financial cycles volatility.

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Prone to Fail: The Pre-Crisis Financial System

The Journal of Economic Perspectives ◽

10.1257/jep.33.1.81 ◽

2019 ◽

Vol 33 (1) ◽

pp. 81-106 ◽

Cited By ~ 6

Author(s):

Darrell Duffie

Keyword(s):

Housing Market ◽

Financial Stability ◽

Financial System ◽

Market Discipline ◽

Real Economy ◽

Balance Sheets ◽

The Core ◽

Better Regulation ◽

Weakly Supervised ◽

The Impact

The financial crisis that began in 2007 was triggered by over-leveraged homeowners and a severe downturn in US housing markets. However, a reasonably well-supervised financial system would have been much more resilient to this and other types of severe shocks. Instead, the core of the financial system became a key channel of propagation and magnification of losses suffered in the housing market. Critical financial intermediaries failed, or were bailed out, or dramatically reduced their provision of liquidity and credit to the economy. In short, the core financial system ceased to perform its intended functions for the real economy at a reasonable level of effectiveness. As a result, the impact of the housing-market shock on the rest of the economy was much larger than necessary. In this essay, I will review the key sources of fragility in the core financial system. I discuss the weakly supervised balance sheets of the largest banks and investment banks; the run-prone designs and weak regulation of the markets for securities financing and over-the-counter derivatives; the undue reliance of regulators on “market discipline; and the interplay of too-big-to-fail and the failure of market discipline. Finally, I point to some significant positive strides that have been made since the crisis: improvements in the capitalization of the largest financial institutions, a reduction of unsafe practices and infrastructure in the markets for securities financing and derivatives, and a significantly reduced presumption that the largest financial firms will be bailed out by taxpayer money in the future. But I will also mention some remaining challenges to financial stability that could be addressed with better regulation and market infrastructure.

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Importance of Macroprudential Policy Implementation for Safeguarding Financial Stability

Journal of Central Banking Theory and Practice ◽

10.1515/jcbtp-2016-0021 ◽

2016 ◽

Vol 5 (3) ◽

pp. 79-98 ◽

Cited By ~ 2

Author(s):

Milena Vučinić

Keyword(s):

Policy Implementation ◽

Financial Stability ◽

Financial System ◽

Precise Determination ◽

Institutional Framework ◽

System Stability ◽

Economic Policies ◽

Macroprudential Policy ◽

Systemic Risks ◽

Potential Risks

Abstract The crisis pointed to the necessity for strong and stable financial system resistant to potential risks and shocks. Macroprudential policy is used to identify, monitor and asses systemic risks to financial stability. Therefore, it is very important to create effective and efficient macroprudential policy. To achieve this, it is crucial to create a strong institutional framework. This paper deals with the importance of macroprudential policy for financial system stability. The first part of the paper explains the macroprudential policy and its connection with other economic policies. The second part refers to the necessity of building strong institutional framework and the importance of providing clear responsibilities for macroprudential policy, as long as precise determination of responsibilities is very suggested and important for further functioning and policy implementation. Responsibilities for macro-prudential policy and macroprudential supervision defers among countries.

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Macroprudential Policy Versus Other Economic Policies

10.15179/ces.23.2.2 ◽

2021 ◽

Vol 23 (2) ◽

pp. 33-66

Author(s):

Eva Lorenčič ◽

◽

Mejra Festić ◽

Keyword(s):

Financial Crises ◽

Financial Stability ◽

Global Financial Crisis ◽

Financial System ◽

Policy Instruments ◽

Economic Policies ◽

Macroprudential Policy ◽

Descriptive Research ◽

The Stability ◽

The Global Financial Crisis

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.

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CENTRAL BANK POLICY MIX: KEY CONCEPTS AND INDONESIA’S EXPERIENCE

Buletin Ekonomi Moneter dan Perbankan ◽

10.21098/bemp.v18i4.573 ◽

2016 ◽

Vol 18 (4) ◽

pp. 379-408

Author(s):

Perry Warjiyo

Keyword(s):

Central Bank ◽

Capital Flows ◽

Financial Stability ◽

Financial System ◽

System Stability ◽

Decision Making Process ◽

Policy Mix ◽

Macroprudential Policy ◽

Systemic Risks ◽

Key Concepts

The global crisis brings about renewed reforms on central bank policy. First, in addition to the traditional mandate of price stability, there are strong supports for additional mandate of the central bank to promote financial system stability. Second, macroprudential policy is needed to address procyclicality and build-up systemic risks in the macro-financial linkages of financial system that in most cases precede and deepen financial crisis. Third, monetary and financial stability are also prone to volatility of capital flows, especially for the emerging countries, and thus there is a need to manage them. The challenge is how to mix the policies of monetary, macroprudential, and capital flows management to meet the renewed mandate of central bank on monetary and financial stability. This paper reviews theoretical underpinnings and provides key concepts to address the issues. We show that central bank policy mix is both conceptually coherent and practically implementable. We provide a concrete recommendation with a reference from Indonesia’s experience since 2010. We also raise a number of challenges from practical point of views, especially relating to decision making process, forecasting model, and communication, for the success of the policy mix.

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ANALISIS DAMPAK BAURAN KEBIJAKAN MONETER DAN MAKROPRUDENSIAL TERHADAP STABILITAS HARGA DAN STABILITAS SISTEM KEUANGAN DI INDONESIA

JURNAL DINAMIKA EKONOMI PEMBANGUNAN ◽

10.14710/jdep.2.3.31-52 ◽

2020 ◽

Vol 2 (3) ◽

pp. 31

Author(s):

Nisaulfathona Hidayati ◽

FX Sugiyanto

Keyword(s):

Exchange Rate Volatility ◽

Financial System ◽

Policy Instruments ◽

System Stability ◽

Price Stability ◽

Policy Mix ◽

Macroprudential Policy ◽

Vector Error Correction ◽

Macroprudential Policies ◽

The Impact

The financial crisis that has happened has changed the perspective of the central banks in the world, including Indonesia in viewing that financial system stability is also important in addition to price stability. In achieving this goal, Bank Indonesia formulated a policy namely the Bank Indonesia Policy Mix which is the integration of monetary and macroprudential policies.This research aims to analyze the impact of the monetary and macroprudential policy mix on price stability and financial system stability in Indonesia. The analysis method applied in this study is Vector Error Correction Model (VECM) and Granger Causality. The results of the study show that both monetary and macroprudential policies can achieve price stability. In achieving financial system stability, monetary policy instruments take longer than macroprudential policies. The monetary and macroprudential policy mix instruments can reduce inflation volatility and exchange rate volatility so as to encourage price stability and financial system stability.

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Fiinancial Stability and Reform of the Financial System

Creative and Knowledge Society ◽

10.2478/v10212-011-0025-1 ◽

2012 ◽

Vol 2 (2) ◽

pp. 58-69

Author(s):

Juraj Sipko

Keyword(s):

Financial Crisis ◽

Systemic Risk ◽

Financial Stability ◽

Global Financial Crisis ◽

Financial System ◽

Financial Sector ◽

Regulatory Reform ◽

Economic Costs ◽

Literature Study ◽

Macroprudential Policy

Abstract The paper describes the main features of financial stability and the preparation of the reform of the global financial system. The mortgage crisis in the USA brought about the global financial crisis. This crisis was the result of the failure of financial regulation, including supervision, and the failure of the management of the banking industry. Therefore, the international community, including Group 20, urged the appropriate institutions to introduce a comprehensive reform of the financial sector. To avoid a potential financial crisis, the creation of the framework for financial stability would be needed. In line with this, the paper examines the interaction between both monetary and fiscal policies, including micro-and macroprudential policies and their instruments. Although still is going on discussion on definition of macroprudential policy, there is a generally accepted opinion that macroprudential policy should limit systemic risk. In addition, this policy should focus on interaction between the financial system and the real economy. Furthermore, micro- andmacroprudential policy should use appropriate instruments in dealing with the systemic risk. In this regard, the article undescores that put in a place the frameworkfor financial stability will create favorable conditions for decision-makers how they should to respond to financial imbalances. The paper also pointed out some potential economic costs related to the implementation of the overall international reform of the financial sector. Based on comprehensive literature study, the author came to the conclusion that despite the fact that there will be some economic costs related to implementing the overall regulatory reform of the financial sector, the main benefit from the long-term perspective will be avoiding the potential financial crisis in the future. To fulfill all the requirements for global financial reform, international cooperation will be needed.

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Influence of internal and external risks on sustainability of financial system of Аltai krai

Voprosy regionalnoj ekonomiki ◽

10.21499/2078-4023-2018--4-133-136 ◽

2018 ◽

Vol 35 (4) ◽

pp. 133-136

Author(s):

R. N. Ibragimov

Keyword(s):

Sustainable Development ◽

Financial Stability ◽

Management Strategy ◽

Financial System ◽

Risk Management Strategy ◽

The Sustainable Development ◽

The Stability ◽

The Impact

The article examines the impact of internal and external risks on the stability of the financial system of the Altai Territory. Classification of internal and external risks of decline, affecting the sustainable development of the financial system, is presented. A risk management strategy is proposed that will allow monitoring of risks, thereby these measures will help reduce the loss of financial stability and ensure the long-term development of the economy of the region.

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Values-Based and Global Systemically Important Banks: Their Stability and the Impact of Regulatory Changes After the Financial Crisis on it

Asia-Pacific Financial Markets ◽

10.1007/s10690-021-09332-w ◽

2021 ◽

Author(s):

Theresa Schäfer ◽

Sebastian Utz

Keyword(s):

Financial Crisis ◽

Financial Stability ◽

Social Impact ◽

Bank Stability ◽

Regulatory Changes ◽

The Difference ◽

The Impact ◽

Systemically Important Banks

AbstractWe study the financial stability of Values-Based Banks (VBBs) and Global Systemically Important Banks (GSIBs), and how regulatory changes in the aftermath of the financial crisis affected bank stability. These two types of banks allow contrasting an environmental and social impact banking approach to a conventional one. VBBs exhibit significantly higher financial stability before and during the financial crisis. However, regulatory changes in the aftermath of the financial crisis requiring higher capital buffer, have significantly affected GSIBs and rendered the difference in stability levels insignificant.

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Exploring the Role of Islamic Fintech in Combating the Aftershocks of COVID-19: The Pen Social Innovation of the Islamic Financial System

Journal of Open Innovation Technology Market and Complexity ◽

10.3390/joitmc7020136 ◽

2021 ◽

Vol 7 (2) ◽

pp. 136

Author(s):

Mustafa Raza Rabbani ◽

Abu Bashar ◽

Nishad Nawaz ◽

Sitara Karim ◽

Mahmood Asad Mohd. Ali ◽

...

Keyword(s):

Financial Services ◽

Open Innovation ◽

Financial Stability ◽

Social Innovation ◽

Global Financial Crisis ◽

Financial System ◽

Real Economy ◽

Business Context ◽

The World

The purpose of the current study is to investigate the role of the Islamic financial system in recovery post-COVID-19 and the way Fintech can be utilized to combat the economic reverberations created by COVID-19. The global financial crisis of 2008 has established the credentials of the Islamic financial system as a sustainable financial system which can save the long run interests of the average citizens around the world while adding value to the real economy. The basic ethical tenets available in the Islamic financial system make it more suited and readymade to fight the economic aftershocks of a pandemic like COVID-19. The basic principles of ethical Islamic finance have solid connections to financial stability and corporate social responsibility within the wide-reaching business context. With the emergence of Financial technology (Fintech) it has provided a missing impetus to the Islamic financial system to compete on equal ground with its conventional counterpart and prove its mettle. The study uses discourse analysis along with the content analysis to extract content and draw a conclusion. The findings of the study indicate that COVID-19 pandemic has provided the opportunity for the social and open innovation to grow and finance world have turned to open innovation to provide a speedy, timely, reliable, and sustainable solution to the world. The findings of the study provide significant implications for governments and policy makers in efficient application of Fintech and innovative Islamic financial services to fight the economic consequences of the COVID-19 pandemic.

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