Macroprudential Policy: Still a Work in Progress
While the necessity for macroprudential policy is now broadly accepted, its implementation remains a work in progress. The higher interest rates we’re likely to see in the near future (at least in the U.S. and UK) will present an interesting opportunity to assess which model of macroprudential supervision works best: the UK Financial Policy Committee (FPC), which resides within the Bank of England, or the U.S. Financial Stability Oversight Council (FSOC), which is an independent body.
These institutional arrangements have several implications. Being part of the central bank may quicken decision-making for an entity like the FPC while it benefits from the institution’s political neutrality. In contrast, placing those functions in an independent committee safeguards the central bank’s credibility and independence.
Independently of the framework chosen, the central banks should lead systemic risk assessment as they are best equipped, by virtue of their expertise and analytical capacity, to have a comprehensive overview of the financial system and the economy. Furthermore, as lender of last resort, they bear the cost of crisis management. Recent unconventional monetary policies and the resulting expanded balanced sheets (which more than doubled for the Federal Reserve and tripled for the BoE during the financial crisis) are good illustrations. These policies have created more interference in the capital markets than policies conducted in ordinary times. Such spillovers demonstrate the necessity of finding the appropriate mix between monetary and macroprudential policy, which are highly complementary.
Ultimately, the success of macroprudential supervision in supporting financial market stability and, thus, long-term investors’ ability to provide capital to the real economy, will rely on these key components: strong governance; an overall macroeconomic policy framework; a holistic approach to regulation that includes ongoing consultation with asset managers, banks, insurance companies and other financial institutions before taking action; and international coordination.