General Information & Client Service
  • Americas: +1.212.553.1653
  • Asia: +852.3551.3077
  • China: +86.10.6319.6580
  • EMEA: +44.20.7772.5454
  • Japan: +81.3.5408.4100
Media Relations
  • New York: +1.212.553.0376
  • London: +44.20.7772.5456
  • Hong Kong: +852.3758.1350
  • Tokyo: +813.5408.4110
  • Sydney: +61.2.9270.8141
  • Mexico City: +001.888.779.5833
  • Buenos Aires: +0800.666.3506
  • São Paulo: +0800.891.2518
September 22, 2017

Tobias Adrian, IMF Financial Counsellor, spoke about macro-prudential policy and financial vulnerabilities. He noted that policy makers might care about sharp movements in financial conditions, even if those do not necessarily lead to systemic disruptions of the financial sector’s intermediation capacity.

Cyclical macro-prudential policy is often described as mitigating systemic risk in the time dimension. Mr. Adrian said, "I distinguish financial vulnerabilities from financial conditions." Financial conditions refer to the ease of financing across funding markets, including credit, equity, money, and foreign currency markets, reflecting the pricing of risk and underwriting standards in different asset markets. When financial vulnerability is high and financial conditions are loose, risks to financial stability are likely higher than when financial vulnerability is high and financial conditions are broadly neutral. The key frictions such as extrapolative expectations, competition leading to excessive risk-taking across institutions, and the leverage cycle due to risk management practices can lead to excessive variation in financial conditions that can be fueled by certain market failures. In the face of these frictions, the tasks of cyclical macro-prudential policies are two-fold: to lean against the buildup of financial vulnerabilities for reducing macro-financial amplification mechanisms and to build temporary buffers when financial conditions are overly easy and financial vulnerabilities are growing.

 

He further noted that there is clearly a close connection to monetary policy, which acts by impacting financial conditions. Monetary policy can also be steered deliberately to offset changes in financial conditions. As per Mr. Adrian, "The advantage of using monetary policy more systematically to steer financial conditions is that it can get into all of the cracks, while macro-prudential policy can be arbitraged across jurisdictions, markets, or institutions. There are also limitations to using monetary policy. Monetary policy cannot induce changes in resilience, unlike macro-prudential policy. Monetary policy is not targeted enough to address differential financial conditions across sectors of the economy. Furthermore, monetary policy has price stability as primary mandate. It may not be able to respond enough to offset a build-up of risks given trade-offs relative to its inflation objective." Talking about the way forward, he argued that cyclical macro-prudential policy might aim at mitigating sharp movements in financial conditions, even if those do not entail system disruptions in the intermediation capacity of the financial system. There is ample evidence that adverse movements to financial conditions impact risks to GDP growth adversely, even in the absence of systemic disruptions.

 

Related Link: Speech

Keywords: International, Banking, Macro-Prudential Policy, Financial Vulnerabilities, Financial Stability, IMF

Related Articles
News

FDIC Consults on Approach to Resolution Planning for IDIs

FDIC approved an Advance Notice of Proposed Rulemaking (ANPR) and is seeking comment on ways to tailor and improve its rule requiring certain insured depository institutions (IDIs) to submit resolution plans.

April 22, 2019 WebPage Regulatory News
News

EP Resolution on Proposal for Sovereign Bond Backed Securities

The European Parliament (EP) published adopted text on the proposal for a regulation of the European Parliament and of the Council on sovereign bond-backed securities (SBBS).

April 16, 2019 WebPage Regulatory News
News

HKMA Decides to Maintain Countercyclical Capital Buffer at 2.5%

HKMA announced that, in accordance with the Banking (Capital) Rules, the countercyclical capital buffer (CCyB) ratio for Hong Kong remains at 2.5%.

April 16, 2019 WebPage Regulatory News
News

EP Approves Agreement on Package of CRD 5, CRR 2, BRRD 2, and SRMR 2

The European Parliament (EP) approved the final agreement on a package of reforms proposed by EC to strengthen the resilience and resolvability of European banks.

April 16, 2019 WebPage Regulatory News
News

PRA Finalizes Policy on Approach to Managing Climate Change Risks

PRA published the policy statement PS11/19, which contains final supervisory statement (SS3/19) on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change (Appendix).

April 15, 2019 WebPage Regulatory News
News

PRA Seeks Input and Issues Specifications for Insurance Stress Tests

PRA announced that it will conduct an insurance stress test for the largest regulated life and general insurers from July to September 2019.

April 15, 2019 WebPage Regulatory News
News

EBA Single Rulebook Q&A: First Update for April 2019

EBA published answers to nine questions under the Single Rulebook question and answer (Q&A) updates for this week.

April 12, 2019 WebPage Regulatory News
News

FED Updates Form and Supplemental Instructions for FR Y-9C Reporting

FED updated the form and supplemental instructions for FR Y-9C reporting. FR Y-9C is used to collect data from domestic bank holding companies, savings and loan holding companies, U.S intermediate holding companies, and securities holding companies with total consolidated assets of USD 3 billion or more.

April 11, 2019 WebPage Regulatory News
News

EIOPA Statement on Application of Proportionality in SCR Supervision

EIOPA published a supervisory statement on the application of proportionality principle in the supervision of the Solvency Capital Requirement (SCR) calculated in accordance with the standard formula.

April 11, 2019 WebPage Regulatory News
News

ISDA Publishes Statement on FRTB Implementation in Emerging Markets

ISDA published a statement that outlines challenges in implementation of the new Basel III market risk standard for banks in emerging markets.

April 11, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 2929