By Erlend W. Nier, Jacek Osiński, Luis I. Jácome, and Pamela Madrid
International Monetary Fund (IMF), Working Paper No. 11/250, November 2011 —
Summary: A number of countries are reviewing their institutional arrangements for financial stability 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. Against this background, this paper provides basic guidance for the design of effective arrangements, in a manner that can provide a framework for country-specific advice. After reviewing briefly the main institutional elements of existing and emerging macroprudential policy frameworks across countries, the paper identifies stylized institutional models based on key features that distinguish institutional arrangements. It develops criteria to assess the effectiveness of models, examines the strengths and weaknesses of models against these criteria, and explores ways to improve existing setups. The paper finally distills lessons and sets out desired principles for effective macroprudential policy arrangements.
[An excerpt from the Working Paper reads]:
This paper builds on the work of the IMF policy paper on Macroprudential Policy: An Organizing Framework (IMF 2011a), and responds to the IMF Board recommendation that “more needs to be done to establish criteria for assessing the effectiveness of different institutional setups for macroprudential policies.” Indeed, while macroprudential policy has received significant attention in the literature, most emphasis has been placed on recognizing and assessing systemic risks and on identifying the instruments that should be part of the macroprudential policy toolkit. The design of the institutional setup for macroprudential policy has received less consideration.
The IMF has a strong interest in ensuring that effective macroprudential policy frameworks are present in all countries. Effective arrangements enabling the authorities to take preventive action are desirable for all countries, emerging or advanced. Thus, the paper reviews the institutional underpinnings for macroprudential policies across countries, and explores ways to improve existing institutional setups, in a manner so as to provide basic guidance for the design of such arrangements. In line with previous work and in agreement with the Bank of International Settlements (BIS) and the Financial Stability Board (FSB), macroprudential policies are defined here as those polices that use primarily prudential tools to limit systemic or system-wide financial risks. . . .
>>Read the full Working Paper here (wp11250.pdf).