Institutional Models for Macroprudential Policy

A number of countries are reviewing their institutional frameworks for financial stability so as to support the development of a macroprudential policy function. In some cases, this involves a rethink of the appropriate institutional boundaries between central banks and financial regulatory agencies, or the setting up of dedicated policymaking committees. In others, efforts are underway to enhance cooperation within the existing institutional structure.

Effective arrangements enabling the authorities to take preventive action are strongly desirable for all countries, emerging or advanced. This paper therefore lays out some basic guidance for the review of institutional arrangements supporting macroprudential policies. It identifies a distinct set of stylized institutional models, sets out criteria for assessing different models, examines their strengths and weaknesses, and explores ways to improve existing institutional setups.

Institutional arrangements will be shaped in no small part by country-specific circumstances, so that there can be no “one size fits all.” The analysis nonetheless identifies those features of models that are desirable for effective macroprudential policymaking (Box 1). Among others, it finds that complex and fragmented institutional structures can create frictions in risk identification and mitigation that can reduce effectiveness of macroprudential policy. To ensure accountability for policy outcomes, moreover, it may often be desirable to identify a lead authority or policymaking committee and to vest it with the mandate and powers to conduct macroprudential policy. The central bank should play an important role, so as to harness its expertise in risk assessment and its incentives to mitigate systemic risk, as well as to ensure coordination with monetary policy. While participation of the treasury in the policy process is useful, a strong role can pose risks to the established autonomy of separate policy fields, such as monetary and microprudential policy, and lead to delay when policies are needed to constrain financial markets in good times. Separate arrangements for crisis prevention and crisis management will be useful in many cases.

More generally, for institutional arrangements to be conducive to effective mitigation of systemic risk they need to (i) support effective identification of risks through access to information and relevant expertise, (ii) provide incentives for the timely and effective use of policy tools, and (iii) ensure the cooperation across policies in a manner that preserves the autonomy of established policy functions. While each of the assessed models has pros and cons, there are differences in their tally of strengths and weaknesses. Additional mechanisms can be introduced to compensate some of the weaknesses. In general, these will differ across models, but some mechanisms will be useful additions for several models and are likely to enhance effectiveness of macroprudential policy more broadly.

Box 1. Key Desirables for Macroprudential Policy Arrangements General

1. The central bank should play an important role in macroprudential policymaking.

2. Complex and fragmented regulatory structures are unlikely to be conducive to successful mitigation of systemic risk and should therefore be avoided.

3. Participation of the treasury in the policy process is useful, but a leading role poses risks.

4. Systemic risk prevention and crisis management are different policy functions that should be supported by separate organizational arrangements.

5. Macroprudential policy frameworks should not become a vehicle to compromise the autonomy of other established policies.

6. Arrangements need to take account of country-specific circumstances. Provide for effective identification, analysis, and monitoring of systemic risk

7. Mechanisms for effective sharing of all information needed to assess systemic risks should be in place.

8. At least one institution involved in assessing systemic risk should have access to all relevant data and information. It should be the one that disposes of the best existing expertise to assess systemic risk.

9. Mechanisms are needed to challenge dominant views of one institution. Provide for timely and effective use of macroprudential policy tools

10. Institutional mechanisms should support willingness to act against the buildup of systemic risk and reduce the risk of delay in policy actions.

11. A lead macroprudential authority should be identified and be provided with a clear mandate and powers, in a manner that harnesses incentives of existing institutions to mitigate systemic risk.

12. The mandate needs to be matched by sufficient powers, including to initiate the use of prudential tools to address systemic risk. Mechanisms should be established to expand powers when needed.

13. The mandate should give primacy to the mitigation of systemic risk, but include secondary objectives to ensure that the policymaker takes into account costs and trade-offs.

14. To guard against overly restrictive or inadequate policy, proper accountability and transparency need to be put in place, without unduly compromising the effectiveness of macroprudential policy. Provide for effective coordination across policies to address systemic risk

15. Institutional integration of financial regulatory functions within the central bank can support effective coordination of macroprudential policy with monetary as well as microprudential policy, but also requires safeguards.

16. Where institutional separation of policy decisions and control over policy tools cannot be avoided, the legal framework needs to assign formal powers to recommend or direct action of other policymakers.

17. Where there is distributed decision making among several agencies, establishing a coordinating committee is useful, but may not necessarily be sufficient to overcome collective action and accountability problems.

Institutional Models for Macroprudential Policy. International Monetary Fund. Nier, Erlend; Osinski, Jacek; Jácome, Luis Ignacio; Madrid, Pamela. November 01, 2011.IMF Staff Discussion Note No. 11/18

Institutional Models for Macroprudential Policy