On Tuesday 6 September, ACFS hosted a Boardroom Briefing featuring Dr Eugenio Cerutti, Assistant to the Director of the Research Department of the International Monetary Fund (IMF). Dr Cerutti presented on the topic ‘The Use and Effectiveness of Macroprudential Policies’, drawing on insights from a recent paper published in the Journal of Financial Stability.
Macroprudential policies are those aimed at mitigating systemic risks in the financial system. They are distinct from microprudential policies, which target idiosyncratic risks and seek to ensure the soundness of individual financial institutions. They are also distinct from traditional macroeconomic levers, like monetary and fiscal policy. Dr Cerutti noted that regulators’ understanding of macroprudential policies is still very limited. The existing literature can be broadly divided into two groups: cross-country analyses, and country case studies. Dr Cerutti’s research falls into the former category.
The research examines the use of macroprudential instruments in 119 countries over the period 2000 to 2013. Data were collected via a comprehensive IMF survey called the Global Macroprudential Policy Instruments (GMPI) survey. Dr Cerutti’s team examined 12 specific instruments, which included countercyclical capital buffers, leverage ratios for banks, loan-to-valuation (LTV) ratios, reserve requirement ratios, limits on interbank exposures, and concentration limits. The data show that advanced economies have far fewer macroprudential tools than emerging economies, but are rapidly introducing more.
Econometric analysis suggests that the effects of macroprudential tools vary widely between countries. For instance, LTV ratio caps appear to be effective in constraining credit in emerging markets, but their effect is not significant in advanced economies. In addition, macroprudential policies are shown to be more effective in countries that have experienced a credit boom. This could be an argument for ‘dynamic provisioning’ (i.e. requiring banks to build up loan loss provisions during a credit boom) or for increasing LTV caps in a boom.
Overall, the analysis indicates that macroprudential policies do result in a temporary ‘cooling effect’ in the form of lower credit growth. But the data show that the higher the number of macroprudential instruments a country has in its arsenal, the higher its share of cross-border banking claims – suggesting that borrowers may be attempting to circumvent local lenders. This would suggest the need for tools to regulate capital flows in open economies. The research does not draw conclusions about governance structures, i.e. whether macroprudential tools should be assigned to central banks or supervisory agencies.
Participants discussed some of the limitations of the survey methodology. For one, the survey records only binary data (i.e. a country is deemed to either have a macroprudential instrument or not). There is no measure of intensity of use. In addition, some countries may interpret the definitions of certain instruments in different ways. One participant noted that Australian regulators engage in ‘open mouth’ operations that communicate their intentions to market participants – which may have the same effect as a macroprudential instrument without that instrument actually being deployed. Participants also noted that the actions of Australian state governments to raise stamp duties on properties purchased by foreign investors may function like a macroprudential instrument.
One participant asked what the research says about the relative efficacy of different macroprudential instruments. Dr Cerutti noted that instruments need to be calibrated to each country’s specific circumstances, and that the research did not conclude that some instruments were definitively better than others.