Jaime Caruna of BIS gives a speech on macroprudential policy. Summary of the speech is:
The speech places macroprudential policy within the emerging framework for financial stability and discusses the challenge entailed in turning this macroprudential concept into a reality. Macroprudential policies are designed to increase the stability and resilience of the financial system as a whole, not just of individual institutions or markets. To achieve financial stability, prudential policies need the support of sound macroeconomic policies.
Monetary policy should respond in a symmetric fashion during the boom and bust phases of financial and business cycles. Fiscal policy must play a supporting role as well, and international cooperation is vital. Policymakers need to respect the limits of macroprudential policy and to avoid any overconfidence that it can fine-tune the macroeconomic cycle.
At best, such policy can relieve some of the pressure on traditional macroeconomic tools. Since macroprudential policy has yet to be implemented comprehensively, policymakers should not expect too much from it. The elements of this macroprudential framework need to be calibrated carefully and complemented with a more active approach to supervision.
He says some central banks have already adopted macroprudential policies before the crisis. Asian Central banks in particular have taken lead:
At this stage, it is important for us to recognise that macroprudential policy has never been used comprehensively; it has only been used on an ad hoc basis. We are still learning. Asian central banks have taken the lead in implementing various macroprudential tools before and following the experience of the 1997 crisis (see table below). For example, central banks in the region have used countercyclical provisioning, loan-to-value (LTV) ratios and direct controls on lending to specific sectors to manage procyclicality in their financial systems. They are also addressing aggregate risk in the financial system through capital surcharges for systemically important financial institutions.
A well known example of the use of LTV regulation is Hong Kong in the 1990s, as, with a currency pegged to the US dollar, the Hong Kong Monetary Authority could not use interest rates to lean against buoyant real estate prices and the associated rapid growth of bank lending. Less well known but equally important is the experience of the Reserve Bank of India (RBI), which has also been active in introducing macroprudential tools. The RBI has introduced measures to restrain credit growth for housing and consumer finance, to reduce excessive speculation in equity and commodity markets, and to build up buffers through countercyclical provisioning.
Emphasis is mine. There is a table on page 3 which looks at various macroprudential tools and which central banks adopted them. RBI features in four of them:
- Countercyclical Provisioning
- Capital surcharges for systematic important banks
- liquidity requirements/funding
- limits on currency mismatches
This is quite true actually. Lot less is known about RBI’s various measures it took to prevent build up of excesses in the system. The recent speeches focus on RBI’s management of the crisis but lot of work happened before the crisis as well.
In his recent speech Dr Subbarao says:
The recent crisis has clearly been a turning point in the world view on capital controls. The Asian crisis of the mid-90s demonstrated the risk of instability inherent in a fully open capital account. Even so, the intellectual orthodoxy continued to denounce controls on capital flows as being inefficient and ineffective. The recent crisis saw, across emerging economies, a rough correlation between the extent of openness of the capital account and the extent of adverse impact of the crisis. Surely, this should not be read as a denouncement of open capital account, but a powerful demonstration of the tenet that premature opening hurts more than it helps.
Notably, the IMF published a policy note in February 20102 that reversed its long held orthodoxy. The note has referred to certain ‘circumstances in which capital controls can be a legitimate component of the policy response to surges in capital flows’. Now that there is agreement that controls can be ‘desirable and effective’ in managing capital flows in select circumstances, the IMF and other international bodies must pursue research on studying what type of controls are appropriate and under what circumstances so that emerging economies have useful guidelines to inform policy formulation.
(again emphasis is mine)
But why not RBI? RBI has experience on capital inflows and controls as well. It is likely to be better than IMF as RBI has faced this. The issue of cost benefit analysis of managing the trinity and the issues faced, needs to be discussed in public domain.
Likewise little is known about the central bank’s views on financial regulation, central banking, balancing the various goals etc. Even concepts like inflation expectations which are a bread and butter for central bank, less is known. What leads to inflation expectations? How do we manage them? etc etc. Most research comes from IMF (see IMF one on inflation expectations which got comments from RBI Governor) and other sources. Other Central Banks are far more active in the research space.
This post is not about criticising RBI. It is actually just the other way round. RBI has done a fair job and needs to explain these things better. (Though lot more still needs to be done. THis is the case with every central bank/institution. You need to keep changing with times.)
It should release far more research than it does. One should blow the trumpet once a while especially when it is criticised so much. Yes, RBI criticism is back in fashon again. The critiques vanished as crisis struck but have again resurfaced now.