Macroprudential Policy: What Instruments and How to Use Them? - - PowerPoint PPT Presentation

Macroprudential Policy: What Instruments and How to Use Them?

Xiaoyong Wu Monetary and Capital Markets Department

Lessons from Country Experiences

I. Country experiences with macroprudential instruments

• II. Effectiveness of macroprudential instruments

Outline of the Paper

• II. Effectiveness of macroprudential instruments
• III. Lessons and Policy Messages
• IV. Next Steps: Remaining Gaps

• I. Country Experiences with

Macroprudential Instruments

• 10 of the most frequently used instruments are

examined (mostly prudential)

• Those capable of addressing systemic risk are

What Instruments are Used?

• Those capable of addressing systemic risk are

considered macroprudential

Procyclicality (time dimension) Interconnectedness (cross-sectional dimension)

• Credit-related:

– caps on the loan-to-value (LTV) ratio; – caps on the debt-to-income (DTI) ratio; – caps on foreign currency lending; – ceilings on credit or credit growth.

• Liquidity-related:
• Risks generated by strong

credit growth and asset price inflation.

• Systemic liquidity risk.

Instruments and Risks

• Liquidity-related:

– limits on net open currency positions/currency mismatch (NOP); – limits on maturity mismatch; – reserve requirements.

• Capital-related:

– countercyclical/time-varying capital requirements; – time-varying/dynamic provisioning; – restrictions on profit distribution.

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• Systemic liquidity risk.
• Risks arising from excessive

leverage and the consequent de-leveraging.

• Risks related to large and

volatile capital flows.

20 40 60 80 100 credit growth/ asset price inflation

Objectives of Macroprudential Instruments

20 excessive leverage systemic liquidity risk capital flows/ currency fluctuation

Caps on LTV Limits on maturity mismatch Limit on net open currency positions/currency mismatch Restrictions on profit distribution

Source: IMF Financial Stability and Macroprudential Policy Survey, 2010

Economic Development Stage Size of Financial Sector

What Affects the Choice of Instruments?

Exchange Rate Regime Size of Capital Inflow

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Credit-related Liquidity-related Capital-related Economic Development Stage Advanced 43 19 10 Emerging Market 68 93 68

% of Countries in Each Group Using Each Type of Instruments

Stage Market Exchange Rate Flexible 48 55 40 Managed/ Fixed 100 89 56 Size of Financial Sector Large 48 36 20 Small 67 88 67 Size of Capital Inflow Small 58 54 29 Large 56 68 56

45 45 55 64 36 Fixed Targeted Broad-based Multiple Single

How are the Instruments Used?

41 59 92 8 55 45 20 40 60 80 100 No coordination Coordination Discretion Rule Time-varying Fixed (percent)

• II. Effectiveness of

MacroPrudential Instruments

Dampening procyclicality

• f credit growth?
• f credit growth?
• f leverage?
• f leverage?

Limiting interconnectedness in exposures

to wholesale funding? to wholesale funding? to foreign funding? to foreign funding?

Effectiveness of the Instruments

1 case study 2 simple correlation 3 panel regression

Three Approaches

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Small but diverse group of countries:

China Colombia

Instruments seem to

• 1. Case Study

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Colombia Korea New Zealand Spain USA Some Eastern European countries

Instruments seem to have achieved, to various degrees, their intended

• bjectives.

0.0% 0.5% 1.0% t-2 t-1 t t+1 t+2 t+3 t+4

LTV

(y/y change)

• 1.0%
• 0.5%

0.0% 0.5% 1.0% t-2 t-1 t t+1 t+2 t+3 t+4

DTI

(y/y change)

Change in Credit Growth After the Introduction of Instruments (average across countries)

• 2. Simple Approach
• 1.5%
• 1.0%
• 0.5%

Quarterly

• 3.0%
• 2.5%
• 2.0%
• 1.5%

Quarterly

• 2.0%
• 1.0%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% t-2 t-1 t t+1 t+2 t+3 t+4 Quarterly

Reserve Requirements

(y/y change)

• 2.0%
• 1.5%
• 1.0%
• 0.5%

0.0% 0.5% 1.0% t-2 t-1 t t+1 t+2 t+3 t+4 Quarterly

Dynamic Provisioning

(y/y change)

Credit Growth vs. GDP Growth

• 1%

0% 1% 2% 3% 4% 5%

• 10%
• 5%

0% 5% 10% wth (Percent Quarterly) GDP Growth (Percent Quarterly)

With and Without Caps on Loan-To-Value Ratios

No Caps on LTV (blue) Caps on LTV (red)

• 1%

0% 1% 2% 3% 4% 5%

• 10%
• 5%

0% 5% 10% rowth (Percent Quarterly) GDP Growth (Percent Quarterly)

With and Without Caps on Debt-to-Income Ratios

No Caps on DTI (blue) Caps on DTI (red)

• 2. Simple Approach (cont’d)
• 5%
• 4%
• 3%
• 2%

Credit Grow

• 5%
• 4%
• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 5%

• 10%
• 5%

0% 5% 10% Credit Growth (Percent Quarterly) GDP Growth (Percent Quarterly)

With and Without Reserve Requirement

No Reserve Requirements (blue) Reserve Requirements (red)

• 5%
• 4%
• 3%
• 2%

Credit Gro

• 5%
• 4%
• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 5%

• 10%
• 5%

0% 5% 10% Credit Growth (Percent Quarterly) GDP Growth (Percent Quarterly)

With and Without Dynamic Provisioning

No Dynamic Provisioning (blue) Dynamic Provisioning (red)

Reductions in: Procyclicality of Interconnectedness Credit Leverage Foreign funding Wholesale funding Caps on LTV ✔ ✘ Caps on DTI ✔ ✔ Limits on Credit Growth ✔ ✔

• 3. Panel Regression

Statistically Significant (✔ ✔ ✔ ✔) or Not (✘ ✘ ✘ ✘)

Limits on Credit Growth ✔ ✔ Limits on NOP ✔ ✘ Limits on Maturity Mismatch ✘ ✔ Reserve Requirements ✔ ✔ Time-varying/Dynamic Provisioning ✔ ✔ Countercyclical/Time-varying Capital Requirements ✘ ✔

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• Regression coefficients are:

– Averages of country performances – Not an indication of equal effectiveness in all countries

• 3. Panel Regression: Caveats

– Not an indication of equal effectiveness in all countries – Affected by small sample size (limited number of

• bservations)
• Country-specific circumstances are important for

effectiveness

• III. Lessons and Policy Messages

• Many instruments are found to be effective.
• Effectiveness does not seem to depend on:

– stage of economic development;

Lessons and Policy Messages

– exchange rate regime.

• As with regulation in general, there are costs involved.

– May lower growth unnecessarily. – May generate unintended distortions. – Benefits should be weighed against costs.

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• use single when risk is well-defined from a single source;
• use multiple to tackle a risk from various angles but do not
• verdo.
• use single when risk is well-defined from a single source;
• use multiple to tackle a risk from various angles but do not
• verdo.

Single vs. Multiple:

Using Instruments:

Do’s and Don’ts

• verdo.
• verdo.
• use targeted to minimize cost or distortion;
• use broad-based to limit the scope of circumvention.
• use targeted to minimize cost or distortion;
• use broad-based to limit the scope of circumvention.

Targeted vs. Broad-based:

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• Use fixed to provide a minimum buffer with a low cost
• Make adjustments with changing circumstances - on sound and

transparent principles

• Use fixed to provide a minimum buffer with a low cost
• Make adjustments with changing circumstances - on sound and

transparent principles

Fixed vs. Time-varying:

Using Instruments:

Do’s and Don’ts (cont’d)

transparent principles transparent principles

• Use rules when risk of inaction is high or risk management

capacity is weak

• Use discretion when structural changes occur but with constraint
• Use rules when risk of inaction is high or risk management

capacity is weak

• Use discretion when structural changes occur but with constraint

Rules vs. Discretion:

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• Deeper analysis of interconnectedness (cross-section

dimension).

– Data availability is a constraining factor

Next Steps

• Deeper understanding of design and calibration of

instruments.

• Estimates of cost of implementation: distortions, unintended

consequences.

• Relationship between macroprudential and microprudential

regulation.

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