The recent financial crisis has highlighted the need to go beyond a purely micro approach to financial regulation and supervision. As a consequence, the number of policy speeches, research papers and conferences that discuss a macro perspective on financial regulation has grown considerably. The policy debate is focusing in particular on macroprudential tools and their usage, their relationship with monetary policy, their implementation and their effectiveness. Macroprudential policy has recently also attracted considerable attention among researchers. This paper provides an overview of research on this topic. We also identify important future research questions that emerge from both the literature and the current policy debate.

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Macroprudential policy – a literature review

What manner of organization is the National Bureau of Economic Research? How does it select research topics? Who does the work and what kind of tasks do they perform? Where do the funds come from? How does the National Bureau safeguard the scientific quality of its findings? How are the results disseminated? Visitors to the National Bureau often ask these and similar questions; perhaps the answers will be of interest to readers of the American Statistician. The National Bureau of Economic Research is a private non-profit corporation, formed, according to its charter, "to conduct, or assist in the making of exact and impartial investigations in the field of economic, social and industrial science, and to this end to cooperate with governments, universities, learned societies, and individuals." Hence it is not a government agency, nor an adjunct of a university, nor does it sell research services. The revenue from the only products it does sell, publications, barely covers the printing costs. Its funds are contributed by philanthropic foundations, by trade and professional organizations, by business concerns, trade unions, and individuals. Contributions are usually on a yearly basis, but some grants cover several years. Some of the funds are earmarked for specific studies; the balance goes to support a general program of research. The National Bureau is governed by a Board of Directors numbering about thirty, selected to represent various institutions and diverse points of view on economic problems. Over the years since the Bureau was founded in 1920 this body of men has made a significant contribution to the development of scientific inquiry in economics, both within the National Bureau and outside. Such outstanding economists as Wesley C. Mitchell, George E. Roberts, Allyn A. Young, Edwin F. Gay, Thomas S. Adams, and John R. Commons have been among its members. At the present time professors from a dozen universities are on the Board. Also, Directors from each of the following organizations are elected: American Statistical Association, American Economic Association, American Farm Economic Association, Economic History Association, American Institute of Accountants, American Management Association, Congress of Industrial Organizations, and American Federation of Labor. Finally, there is a group of Directors at Large, men from varied walks of life with an abiding interest in economic research. The Board serves an important function not only in shaping the broad lines of the research program but also in safeguarding the quality of the results. Matters of policy requiring prompt action are handled by an Executive Committee of eleven, elected by the Board from its membership. Arthur F. Burns, the Director of Research, is the member of the Committee who is directly responsible for the research program. The members of the research staff, numbering about twenty-five, direct the individual studies, and are aided in their work by upwards of forty-five research assistants. A staff of typists, bookkeepers, mimeograph operators, etc., brings the total payroll of the National Bureau to roughly a hundred persons. William J. Carson, the Executive Director, handles the Bureau's finances, accounts, and other administrative matters. Not all the employees of the National Bureau work at the main office at 1819 Broadway, New York City. DuLr Financial Research Program is housed at "Hillside," an estate about 10 miles north of Manhattan overlooking the HuLdson River. Other National BureauL investigators are to be fotund at various universities throughout the United States, since cooperative arrangements are maintained with a number of universities that permit their facultv members to engage in National Butreau studies. Government agencies, too, cooperate in similar ways. Such cooperative relationships are a vital feature of our work, and we try to foster them in many ways. The growing acceptance on the part of universities of the view that research is part of the job of a faculty member has helped to make these efforts productive. For example, for a number of years we have appointed promising young men or women holding university positions as Research Associates for one year. The objective is to enable scholars to pursue their research interests in fields in which the National Bureau also has an interest. Since 1930 twenty-six Research Associates, coming from eighteen American colleges or universities and two foreign universities, have been appointed under the plan. The work of several committees is another example of cooperation for the purpose of advancing research. Two committees, one on financial and the other on fiscal research, help to guide our studies in these areas. They are composed of experts from universities, government agencies, and private business. In 1935 the Universities-National Bureau Committee was established for the express purpose of promoting contact

The National Bureau of Economic Research

Survey researchers routinely conduct studies that use different methods of data collection and inference. But for at least the past 60 years, the probabilitysampling framework has been used in most surveys. More recently, concerns about coverage and nonresponse coupled with rising costs have led some to wonder whether non-probability sampling methods might be an acceptable alternative, at least under some conditions (Groves 2006; Savage and Burrows 2007). A wide range of non-probability designs exist and are being used in various settings, including case control studies, clinical trials, evaluation research

Summary Report of the AAPOR Task Force on Non-probability Sampling

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The Role of Bank Capital in the Propagation of Shocks

(ProQuest: ... denotes formulae omitted.)The U.S. economy is currently experiencing a period of significant financial stress. This stress has contributed to the downturn in the economy by boosting the cost of credit and making businesses, households, and financial institutions highly cautious. To alleviate the financial stress and counteract its effects on the economy, the Federal Reserve has reduced the federal funds rate target substantially and undertaken unprecedented actions to support the functioning of financial markets. There will come a point, however, when the Federal Reserve needs to remove liquidity from the economy and unwind special lending programs to ensure a return to sustainable growth with low inflation.In past recoveries, the decision when to tighten policy was based mainly on the strength of business and consumer spending and the degree of upward pressure on prices and wages. An additional element in the current exit strategy will be determining if financial stress is no longer high enough to endanger economic recovery. As financial conditions begin to improve, the various measures of financial stress that the Federal Reserve monitors may give mixed signals. In this situation, policymakers would greatly benefit from having a single, comprehensive index of financial stress. Such an index could also prove valuable further down the road, when the Federal Reserve might again need to decide whether financial stress was serious enough to warrant special attention.This article presents a new index of financial stress - the Kansas City Financial Stress Index (KCFSI). The article explains how the components of the KCFSI capture key aspects of financial stress and shows that high values of the KCFSI have tended to coincide with known periods of financial stress. The article also shows that the KCFSI provides valuable information about future economic growth.The first section of the article discusses the key phenomena that economists generally associate with financial stress. The next section describes the set of financial variables selected to represent these features of financial stress and explains how the variables are combined in the KCFSI. The third section examines the behavior of the KCFSI during past episodes of financial stress and explains how the index can be used to determine the severity of financial stress. The fourth section examines the link between the KCFSI and economic activity, including the transmission of financial stress to economic activity through changes in bank lending standards.I. KEY FEATURES OF FINANCIAL STRESSIn most general terms, financial stress can be thought of as an interruption to the normal functioning of financial markets. Agreeing on a more specific definition is not easy, because no two episodes of financial stress are exactly the same. Still, economists tend to associate certain key phenomena with financial stress. The relative importance of these phenomena may differ from one episode of financial stress to another. However, every episode seems to involve at least one of the phenomena, and often all of them.Increased uncertainty about fundamental value of assets. One common sign of financial stress is increased uncertainty among lenders and investors about the fundamental values of financial assets. The fundamental value of an asset is the present discounted value of the future cash flows, such as dividends and interest payments. Increased uncertainty about these fundamental values typically translates into greater volatility in the market prices of the assets.In some cases, increased uncertainty about the fundamental values of assets reflects greater uncertainty about the outlook for rhe economy as a whole and for specific sectors. The prospective cash flows from stocks, bonds, and loans all depend on future economic conditions. As a result, heightened uncertainty about economic conditions can cause lenders and investors to become less sure of the present discounted values of these cash flows. …

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Financial Stress: What Is It, How Can It Be Measured, and Why Does It Matter?

Measuring financial stress in a developed country: An application to Canada

Les auteurs elaborent un indice de stress financier pour le systeme financier canadien. Le stress est defini comme la tension ressentie par les agents economiques du fait de l'incertitude et des modifications des attentes de pertes dans les institutions et les marches financiers.

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An Index of Financial Stress for Canada

The authors conduct a counterfactual simulation of the proposed rules under the new Basel Capital Accord (Basel II), including the revised treatment of expected and unexpected credit losses proposed by the Basel Committee in October 2003.

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The New Basel Capital Accord and the Cyclical Behaviour of Bank Capital

Within the next several years, implementation of an updated global bank capital accord (Basel II) will commence in a number of countries. The new framework is designed to align bank capital more closely with the likelihood of financial losses and thereby ensure that appropriate levels of capital are held by the banking system. In particular, capital requirements for credit risk will be modified along the lines of how the most sophisticated banks currently calculate capital for their loan portfolios. Since credit risk is strongly related to the business cycle, however, it is useful to examine the degree to which minimum capital requirements for banks are likely to be cyclical. This is achieved by conducting a counterfactual simulation of the proposed rules. When applied to Canadian banking-system data over the period 1984­2003, it is found that minimum required bank capital, as specified by Basel II's first "pillar" for its calculation, will likely fall in level terms. Perhaps more importantly, sensitivity analysis, including that based on different compositions of bank loan portfolios, shows the potential for an increase in the volatility of minimum capital requirements. In addition, changes in minimum required capital and provisions will likely be countercyclical. That is, they will increase during recessions and fall during economic booms. To the extent that these capital requirements influence banks' lending behaviour, there are potential implications for the performance of the economy.

Basel II and the Cyclicality of Bank Capital

The four essays published here provide a useful overview for anyone interested in understanding the issues and policy environment surrounding financial system stability.

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Mark Illing

Papers

Measuring financial stress in a developed country: An application to Canada

An Index of Financial Stress for Canada

The New Basel Capital Accord and the Cyclical Behaviour of Bank Capital

Basel II and the Cyclicality of Bank Capital

Essays on Financial Stability