BCBS – The role of macroprudential policies during economic crises

September 21, 2021 – Speech delivered by general manager Agustin Carstens on the role of macroprudential policies during economic crises to the Council of Arab Central Banks.

Overview: Carstens considered how macroprudential policy can be useful in fighting an economic crisis that may not have originated in financial sector but impacts financial stability. Policymakers in last 20 years have paid growing attention to macroprudential approach to financial stability, using prudential policy instruments from system-wide perspective. Financial crisis of 2007/08 gave major boost to this perspective, made the focus wider. Originally macroprudential policy’s focus was on risks arising from financial factors, Covid showed it was also useful to address financial strains from other shock. Carstens divided remarks under 3 headings, focused on emerging market economies.

Macroprudential Tools During Covid: Covid shock presented unique policy challenges that pushed use of macro prudential policy for new goals, saw rapid deployment of the full range of assistance instruments.As banking sector was in strong financial position when crisis struck, it could be part of the solution by absorbing the shock and continuing to support the real economy. Macroprudential policy interventions played key role, policymakers sought to maximize lender’s ability to supply funding, liquidity rules were relaxed due to strong position. Banks given incentives/assistance to participate in purpose-designed programs in support of hardest hit economic segments, e.g. through debt repayment moratoriums. Overall, financial system responded in desired way, though prudential policy could not achieve this alone, key factor was substantial support from fiscal and monetary policy. Another factor was generally good cyclical position in which economies entered crisis.

Future Risks: Due to lingering effects of pandemic on balance sheets and pace of economic recovery. Different economies at different stages, marked uncertainty will continue to impact. Monetary policy facing tough trade-offs and sustained higher inflation will need a policy response as would a build-up of financial imbalances, fiscal space is more restricted. Sovereign risk could become much more prominent and could severely constrain monetary and prudential policy, especially if the pace of the recovery disappoints. Macroprudential authorities must strike a delicate balance, which will require different policies to act in a concerted way and look beyond the short term to the future. Macroprudential tools can play role in gradually nudging the financial sector to rebuild its buffers and in making sure that the balance sheet scars of Covid heal properly.

Conclusions: Carstens considers that macroprudential policy is very useful addition to policymakers’ arsenal in dealing with non-financial crises, however it is no fairy tale magic wand. Such tools are good complements to other policies, can be part of a stimulus package.Cannot be the main tool in response to a crisis like that triggered by the pandemic. The natural protagonists are fiscal and monetary policy with macroprudential measures playing an important supporting role in complementing the overall package for crisis. A good policy is one that is always looking ahead and prepares for the next challenge. Credibility of the overall policy framework, like prudential buffers, is gradually built during good times in order to be a resource to be most usefully tapped in bad times.

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