Drivers Of Financial Access The Role Of Macroprudential Policies

This study analyzes the drivers of the use of formal vs. informal financial services in emerging and developing countries using the 2017 Global FINDEX data. In particular, we investigate whether individuals’ choice of financial services correlates with macro-financial and macro-structural policies and conditions, in addition to individual and country characteristics. We start our analysis on middle and low-income countries, and then zoom in on sub-Saharan Africa, currently the region that most relies on informal financial services, and which has the largest uptake of mobile banking. We find robust evidence of an association between macroprudential policies and individuals’ choice of financial access after controlling for personal and country-level characteristics. In particular, macroprudential policies aimed at controlling credit supply seem to be associated with greater resort to informal financial services compared with formal, bank-based access. This highlights the importance for central bankers and financial sector regulators to consider the potential spillovers of monetary policy and financial stability measures on financial inclusion.

The crisis has underscored the costs of systemic instability at both the national and the global levels and highlighted the need for dedicated macroprudential policies to achieve financial stability. Building on recent advances, this paper provides a framework to inform the IMF’s country-specific advice on macroprudential policy. It recognizes that developing macroprudential policy is a work in progress, and addresses key issues to help ensure its effectiveness.

This paper develops an open-economy DSGE model with an optimizing banking sector to assess the role of capital flows, macro-financial linkages, and macroprudential policies in emerging Asia. The key result is that macro-prudential measures can usefully complement monetary policy. Countercyclical macroprudential polices can help reduce macroeconomic volatility and enhance welfare. The results also demonstrate the importance of capital flows and financial stability for business cycle fluctuations as well as the role of supply side financial accelerator effects in the amplification and propagation of shocks.

The countercyclical capital buffer (CCB) was proposed by the Basel committee to increase the resilience of the banking sector to negative shocks. The interactions between banking sector losses and the real economy highlight the importance of building a capital buffer in periods when systemic risks are rising. Basel III introduces a framework for a time-varying capital buffer on top of the minimum capital requirement and another time-invariant buffer (the conservation buffer). The CCB aims to make banks more resilient against imbalances in credit markets and thereby enhance medium-term prospects of the economy—in good times when system-wide risks are growing, the regulators could impose the CCB which would help the banks to withstand losses in bad times.

This book is a collection of papers presented in the conference held at the Federal Reserve Bank of Chicago in September 2010, that examines the role of macroprudential regulation in the financial industry. Shocked by the experience of the last few years, many argue that the more traditional microprudential regulatory tools are inadequate to create a safe and stable financial system. The microprudential paradigm relies on the presumption that the financial system as a whole can be made safe by ensuring individual financial institutions are made safe. This ignores interconnections and externalities, whereby the actions of one financial institution or events in financial markets can lead to spillover effects that adversely affect general market conditions, other financial institutions, and ultimately the economy as a whole. Instead, it is argued, there is a need for both microprudential approaches to regulate individual institutions and macroprudential approaches to manage the overall financial system risks. Conference participants discussed macroprudential regulation and related issues, including: What are the theoretical motivations for macroprudential regulation? How would it interact with other regulatory and macroeconomic policies, especially monetary policy? What would be the specific macroprudential tools? Who should have control over the macroprudential tools? How should a macroprudential regulator be structured? Where should it be housed? How can macroprudential policies be structured across national borders? What role, if any, can market discipline play in supporting macroprudential objectives? Concentrating on public policy issues, the conference featured keynote addresses by influential past and present public policy figures including: Paul Volcker, Chairman of the US President's Economic Recovery Advisory Board and former Chairman of the Federal Reserve System; Tommaso Padoa-Schioppa, Chairman, Promontory Financial Group Europe and Former Chairman of the Basel Committee on Banking Supervision; Jaime Caruana, General Manager of the Bank for International Settlements and Former Chairman of the Basel Committee on Banking Supervision; and Charles Taylor, Director of the Pew Charitable Trust Financial Reform Project and Former Executive Director of the Group of Thirty. Contents:Special Addresses:Protecting the Stability of Global Financial Markets (Paul A Volcker)Global Macroprudential Regulation (Tommaso Padoa-Schioppa)The Challenge of Taking Macroprudential Decisions: Who Will Press Which Button(s)? (Jaime Caruana)Macroprudential Regulation and Evolution: Looking at the Financial System Through Darwin's Glasses (Charles Taylor)Why Macroprudential Policies are Needed:Lessons from American Bank Supervision from the Nineteenth Century to the Great Depression (Eugene N White)Coordination with Other Policies:Cross-Border Coordination of Macroprudential Policies (Attila Csajbók and Júlia Király)Macroprudential Policy: Central Banking Reconsidered (Jean-Pierre Landau)Macroprudential Policy and Monetary Policy: Some Lessons from the Euro Area (Domenico Giannone, Michele Lenza, Huw Pill, and Lucrezia Reichlin)Commentary on Macroprudential and Other Policies (E Philip Davis)Components of Macroprudential Regulation:Measuring Systemic Risk (Viral V Acharya)Systemic Risk in Bankruptcy Exceptions, Natural Candidates for Liquidity Charges (Enrico Perotti)Working Macroprudential Tools (Jesús Saurina)Structuring Macroprudential Regulation:On the Governance of Macroprudential Policies (Erlend W Nier)Some Implications of Systemic Risk and the Design of Regulatory Architecture (Marco Espinosa-Vega, Juan Solé, Charles Kahn and Rafael Matta)Cross-Border Issues:The Last Frontier: Protecting Critical Functions Across Borders (Eva H G Hüpkes)Cross-Border Crisis Management: Can Harmonization Create Harmony If the Orchestra Is Dissonant? (Grégory Nguyen and Peter Praet)Regulation and Competition in EU Banking: Before, During, and After the Crisis (André Sapir)Market Discipline:Cycle-Proof Market Discipline and Macroprudential Regulation (Luc Laeven)Curbing Risk on Wall Street (Oliver Hart and Luigi Zingales)What Role, If Any, Can Market Discipline Play in Supporting Macroprudential Policy? (María J Nieto)Policy Panel: Where to from Here?:Macroprudential Regulatory Policies: The New Road to Financial Stability (William R White)Beyond Regulatory Challenge: The New Public Policy Paradigm (Tarisa Wataganase)Challenges for Macroprudential Supervision (Randall Kroszner)Macroprudential Regulation, Financial Stability, and Capital Flows (José De Gregorio) Readership: Undergraduate and graduate students as well as researchers in international finance, central banks and financial regulators. Keywords:Macroprudential Regulation;Financial Regulation;Systemic Risk;Dodd-Frank;International Banking;Financial Crisis;Financial Stability;Bank Capital;Microprudential Regulation;Policy Tools;Cross-Border;Countercyclical Policy;Governance;Failure Resolution;Globalization;Basel III;Contingent Capital;Stress TestsKey Features:Very impressive list of speakers, particularly the keynote speakersThe global perspective provided by leading regulators and academicsThe ‘currentness’ or highly topical nature of the issues addressed

This note provides guidance to facilitate the staff’s advice on macroprudential policy in Fund surveillance. It elaborates on the principles set out in the “Key Aspects of Macroprudential Policy,” taking into account the work of international standard setters as well as the evolving country experience with macroprudential policy. The main note is accompanied by supplements offering Detailed Guidance on Instruments and Considerations for Low Income Countries

Macroprudential policies – caps on loan to value ratios, limits on credit growth and other balance sheets restrictions, (countercyclical) capital and reserve requirements and surcharges, and Pigouvian levies – have become part of the policy paradigm in emerging markets and advanced countries alike. But knowledge is still limited on these tools. Macroprudential policies ought to be motivated by market failures and externalities, but these can be hard to identify. They can also interact with various other policies, such as monetary and microprudential, raising coordination issues. Some countries, especially emerging markets, have used these tools and analyses suggest that some can reduce procyclicality and crisis risks. Yet, much remains to be studied, including tools’ costs ? by adversely affecting resource allocations; how to best adapt tools to country circumstances; and preferred institutional designs, including how to address political economy risks. As such, policy makers should move carefully in adopting tools.

This book deals with the challenges of macro financial linkages in the emerging markets.