“Macro…, what?!” The New Buzz on Financial Stability


José Viñals (l) and Nicolás Eyzaguirre

By José Viñals and Nicolás Eyzaguirre

(Version in Español)

Just a few years ago, “Macro…, what?!” would have been a typical reaction to hearing the technical term that today is the talk of the town among financial regulators.

But in the aftermath of the global financial crisis, macroprudential policy—which seeks to contain systemic risks in the financial system—has indeed come to be an important part of the overall policy toolkit to preserve economic stability and sustain growth.

For example, a number of countries, especially emerging markets, have been relying on macroprudential policies (such as loan-to-value or debt-to-income ratios, or countercyclical loan loss provisions) to rein in rapid credit growth, which—if unchecked—could destabilize the financial system and, ultimately, bring about a recession and drive up unemployment.

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Reducing the Chance of Pulling the Plug on Liquidity


By Jeanne Gobat

The near collapse of the financial system that set off the global crisis was due in part to financial institutions suddenly lacking access to funding markets, and liquidity drying-up across securities markets.

Many financial institutions were unable to roll over or obtain short term funding without sustaining significant losses. This threatened to sink them.

Financial institutions did not factor in how their own responses to a liquidity shortfall could make the entire system shut down and less stable—that is, they underestimated their contribution to systemic liquidity risk in good times, and did not bear the cost of their actions on others in bad times.

It only takes a few institutions to pull the plug on a liquidity-filled bathtub before it runs dry, and the central bank needs to open the spigots again. Continue reading

Macro-Prudential Policies: Putting the “Big Picture” into Financial Sector Regulation


By John Lipsky

The devastating impact of the global financial crisis created a consensus that pre-crisis financial regulation didn’t take the “big picture” of the system as a whole sufficiently into account and, as a result, supervisors in many markets “missed the forest for the trees.” In other words, they did not take into account the macro-prudential aspects of regulation, which has now become the focus of many authorities.

Consensus regarding the need for macro-prudential regulation is particularly striking—previously this type of regulation had been used relatively little and, at present, there are no agreed standards that can be applied internationallyContinue reading

Just Do It—Shaping the New Financial System


By José Viñals

Fearful financial markets, an uncertain growth outlook, fiscal anxieties, long unemployment lines….no other financial crisis since the Great Depression has led to such widespread dislocation in financial markets, with such abrupt consequences for growth, trade, and employment.

The crisis exposed fundamental weaknesses in many areas of the world economy, the most obvious being dramatic deficiencies in the regulation and supervision―nationally and internationally―of financial institutions and markets.

On the bright side, the crisis has provided the impetus for a major overhaul of the financial regulatory system. So, are we making the most of this opportunity to fix the system? Continue reading

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