Poul Thomsen, Director of the IMF European Department spoke, at the “ECB and Its Watchers” Conference in Frankfurt, about the role of macro-prudential policies in maintaining financial stability. He highlighted that, while monetary policy is only available at the euro area-wide level, macro-prudential policies can closely target risks in specific national markets, thus contributing to reduce the heterogeneity in financial and business cycles across member states.
Mr. Thomsen pointed that macro-prudential authorities are now operational in every member state. If deemed necessary, the capital-based macro prudential tools can be “topped-up” by ECB, which also has macro-prudential responsibilities, in addition to its micro-prudential role. He opined and illustrated that "the EU macro-prudential framework would benefit from some simplification. Procedures to activate macro-prudential instruments are complex, involving many authorities at different levels." For example, a few countries—Austria, Belgium, Finland, Luxembourg and the Netherlands—were alerted by the Risk Board in November 2016 about potential overvaluation in their housing markets and about rising household indebtedness. In response, most of these countries tightened prudential or borrower-based tools. However, in case of Belgium and Finland, the activation of capital-based tools took more than six months. This indicates that, decision-making processes should be simplified to ensure that national authorities take timely action. He then informed the audience that IMF is "... developing concrete proposals in this regard."
Next, Mr. Thomsen discussed the use of macro-prudential policies to address concerns related to housing and corporate debt. With regard to corporate debt, he added that France is a recent example. In view of rising corporate debt in the country, the French macro-prudential authority is considering tightening the large exposure limit in big French banks for loans to highly indebted large nonfinancial corporations. Such measures will protect the banking sector against corporate defaults, if any. He, however, added that macro-prudential tools to target corporate credit need to be supplemented by other measures. For instance, the tax deductibility of interest payments in most corporate income tax systems, coupled with no such deductibility for equity financing, creates economic distortions and exacerbates leverage. One way to mitigate this debt bias is to provide a deduction for equity costs. Moreover, all countries have not yet legislated the borrower-based tools with harmonized definitions that are best suited to target specific risks and limit leakage. Experience at the IMF suggests that the problems that macro-prudential policy seeks to address are often caused by other real sector factors, and by “distortions” in other policy areas. He concludes that macro-prudential policies cannot be a substitute for addressing these underlying problems.
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