Macroprudential policy and its instruments Jan Frait Executive Director Financial Stability Department

2 II. Instruments of Macroprudential Policy

3 Macroprudential policy and systemic risk - tools True (genuine) macroprudential tools are those which can be applied in the form of rules and can therefore take the form of built-in stabilisers. They should automatically limit the procyclicality of the financial system or the risky behaviour of individual institutions. They should be explicitly focusing on the financial system as a whole and endogenous processes within it. In addition to true macroprudential tools, various microprudential regulatory and supervisory tools can be used for macroprudential purposes. If these tools are applied not to individual institutions, but across the board to all institutions in the system, they can be regarded as macroprudential instruments. Measures of this type, along with monetary policy tools, fiscal policy tools and tax measures, have been applied in many countries in the past in an effort to slow excess credit growth.

4 Prevention vs. reaction in micro- and macro-approaches Microprudential approach (for example banking supervision): Prevention through enforcement of compliance rules and regulations of prudential behaviour. Reaction when breaching of the rules/regulations is identified and when prudential indicators got worse. Macroprudential approach: Prevention not based on rules and regulations, but on analyses and indicators of systemic risk (as with monetary policy). Prevention can work only through timely and forward-looking action. Paradox of financial (in)stability – most serious risk emerge in good times when prudential indicators look well (they are getting better). Correction action must therefore occur in good times (as with monetary policy).

5 Macroprudential policy and systemic risk – tools I

6 Macroprudential policy and systemic risk – tools II

7 Makroobezřetnostní politika Výsledek mezinárodní diskuse v letech : Cíl finanční stability je důležitým cílem centrálních bank, Měl by být prosazován prostřednictvím makroobezřetnostní politiky jako samostatné kategorie hospodářské politiky spolu s tradičními nástroji a přístupy. V rámci mandátu od G20 tento přístup prosazují společně Financial Stability Board (FSB), IMF a BIS IMF má ambice stát se výkonnou složkou makroobezřetnostní politiky na globální úrovni. Na úrovni EU začala v roce 2011 fungovat Evropská rada pro systémová rizika (ESRB, viz prezentace VG Tomšíka) jako evropská autorita pro makroobezřetnostní politiku ESRB schválil doporučení pro členské země ohledně vytvoření mandátu pro makroobezřetnostní politiku na národní úrovni.

8 Makroobezřetnostní politika – nezbytné definice Na nadnárodní úrovni došlo v loňském roce ke značné konvergenci představ o cílech a nástrojích makroobezřetnostní politiky. Nyní je nutno výsledek diskuse přenést na národní úroveň. Makroobezřetnostní politika představuje aplikaci makroobezřetnostní regulace a makroobezřetnostního dohledu k prosazování cíle finanční stability. Makroobezřetnostní regulace – definování nástrojů pro ovlivňování systémových rizik. Makroobezřetnostní dohled – makro-dohled „na dálku“ spočívající v monitoringu systémových rizik, vydávání varování nebo doporučení pro mikroobezřetností dohled či měnovou politiku a aplikaci makroobezřetnostních nástrojů.

9 References BANK OF ENGLAND (2009): The Role of Macroprudential Policy. Discussion Paper, November BORIO C., FURFINE C. AND LOWE, P. (2001): Procyclicality of the financial system and financial stability: issues and policy options”, in “Marrying the macro- and microprudential dimensions of financial stability”, BIS Papers, No. 1, March, pp. 1–57 BORIO, C – SHIM, I. (2007): “What can (macro)-prudential policy do to support monetary policy. BIS Working Papers, no 242, December. BORIO, C. - P. LOWE, P. (2001): To provision or not to provision. BIS Quarterly Review, September 2001, pp BORIO, C. - WHITE, W. (2004): Whither monetary and financial stability? The implications of evolving policy regimes. BIS Working Paper, No. 147, February BORIO, C. (2003): Towards a macroprudential framework for financial supervision and regulation? BIS Working Paper, No. 128, February BORIO, C. (2009), Implementing the macro-prudential approach to financial regulation and supervision, Banque de France Financial Stability Review, No. 13 — The Future of Financial Regulation, September BORIO, C.-DREHMANN, M. (2009), Towards an operational framework for financial stability: fuzzy measurement and its consequences. BIS Working Paper, No. 284, June CLEMENT, P. (2010): The term “macroprudential”: origins and evolution. BIS Quarterly Review, March 2010, pp WHITE, W. (2006): Procyclicality in the financial system: do we need a new macrofinancial stabilisation framework?, BIS Working Papers, no 193, January.

10 References Frait, J., Komárková, Z. (2009): Instruments for curbing fluctuations in lending over the business cycle. Financial Stability Report 2008/2009, Czech National Bank, pp Frait, J., Komárek, L., Komárková, Z. (2011): Monetary Policy in a Small Economy after the Tsunami: A New Consensus on the Horizon? Czech Journal of Economics and Finance 61, No. 1, pp Frait, J., Komárková, Z. (2011): Financial stability, systemic risk and macroprudential policy. Financial Stability Report 2010/2011, Czech National Bank, pp Frait, J., Gersl, A., Seidler, J. (2011): Credit growth and financial stability in the Czech Republic. World Bank Policy Research Working Paper; no. WPS /08/01 August 2011 Gersl, A., Seidler, J. (2011): Excessive credit growth as an indicator of financial (in)stability and its use in macroprudential policy. Financial Stability Report 2010/2011, Czech National Bank, pp Gersl, A., Jakubík, P. (2010): Procyclicality of the financial system and simulation of the feedback effect. Financial Stability Report 2009/2010, Czech National Bank, CNB, pp Komárková, Z., Geršl, A., Komárek, L. (2011): Models for Stress Testing Czech Banks’ Liquidity Risk. Czech National Bank Working Paper 11/2011.