Macroprudential Policy Framework: A Practice Guide

Damodaran Krishnamurti · Yejin Carol Lee

may 2014 · World Bank Publications

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In the wake of the recent global financial crisis and against the backdrop of the ongoing global financial sector reforms, macroprudential policy is being increasingly seen as a “must-do” reform. At the same time, some policy makers are keen on having a better understanding of what it is and how it works before they embark on implementing it. This Guide attempts to meet this need by providing easy-to-comprehend inputs and practical guidance for establishing and operating macroprudential policy framework as appropriate for relevant jurisdictions. While the elements discussed here can be relevant for several jurisdictions, this work is intended to primarily cater to the needs of policy makers in emerging market and developing economies (EMDEs) with the following characteristics: a simple bank-dominated system where other financial sector segments are small but growing; banks are supervised by the central bank; financial sector regulation and supervision is not fully integrated; and availability of quality data is not assured. The Guide begins with an introduction to the concept of macroprudential approach to policy and supervision, discusses the available options for institutional framework, including appropriate mandate, powers, structures, and governance arrangements. Next, it explains the components and objectives of early warning systems, how they can be designed and what makes them effective. The Guide also analyses the available range of macroprudential policy instruments, the risks or stresses that they can address and how these can be deployed. All through, the Guide also flags the challenges that the authorities are likely to encounter while establishing and operating macroprudential policy framework and components. Unique combinations of institutional, policy, and legal frameworks in each jurisdiction make it difficult to apply across-the-board and formulaic macroprudential policy solutions. Therefore, any guidance will need appropriate customization and nuancing to achieve best results in each jurisdiction. Accordingly, while offering practical advice, the Guide encourages the authorities to ask the right questions rather than trying to answer all questions that might be raised. Macroprudential policy can promote financial system stability, but it is not meant to replace other public policies, least of all a jurisdiction’s monetary and microprudential policies.