Whither macro-prudential policies after the crisis?

The session, Financial Crisis and the role of Macro-Prudential Policies, sponsored by the World Bank Institute, focused on the role of macro-prudential policies, regulation and financial supervision in the post-crisis scenario. As was proven by the emergence of the crisis, traditional macro-prudential regulations were insufficient; hence, there is room for discussion of new and innovative approaches that may help to achieve financial stability.

The session showcased various innovative viewpoints on prudential policies to deal with the adverse changes in macroeconomic and financial conditions, as well as systemic risk. The session highlighted the determinants and tools that can be used for identifying, analysing and curtailing the next possible financial crisis. The panellists represented both national Central Banks and International Financial Institutions (IFIs).

Erlen Nier, from the International Monetary Fund, presented a taxonomy of macro-prudential policies and highlighted current challenges. He summarised three tasks of macro-prudential policies. First, these policies need to reduce the probability and impact of aggregate weakness by applying countercyclical measures. Second, they must reduce the impact of individual failure by discouraging excessive exposure between financial institutions. Finally, they must inhibit bank failure by applying surcharges that are sensitive to systematic risk.

Mario Bergara, President of the Central Bank of Uruguay, argued in favour of an integrated micro and macro prudential approach to financial stability. This approach, he argued, can manage the different threats to financial stability in a more integrated and robust way than current approaches which focus on macro-prudential policies and institutions.

Finally, Asli Demirguc-Kunt, a Senior Economist with the World Bank, argued that the crisis succeeded in challenging our thinking in the area of financial regulation and supervision. She proposed that regulators and policymakers were not available to exert sufficient oversight when it was needed, and could not therefore foresee and curtail the effects of the financial crisis. The presentation showed how a consensus was being forged around banks’ prudential regulation, and how increasing the quality, the consistency and the transparency of bank capital are a priority for bank supervisors. To conclude, Demigurc-Kunt claimed that stronger capital position is an important asset during a systemic crisis; hence the current emphasis on strengthening capital requirements is broadly appropriate.

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