BIS Working Papers
No 337
Macroprudential policy – a
literature review
by Gabriele Galati and Richhild Moessner
Monetary and Economic Department
February 2011
JEL classification: E58, G28.
Key words: Macroprudential policy.
BIS Working Papers are written by members of the Monetary and Economic Department of
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ISSN 1020-0959 (print)
ISBN 1682-7678 (online)
Macroprudential policy – a literature review
1
Gabriele Galati
De Nederlandsche Bank
Richhild Moessner
Bank for International Settlements
Abstract
The recent financial crisis has highlighted the need to go beyond a purely micro approach to
financial regulation and supervision. In recent months, 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.
JEL classification: E58, G28.
Key words: Macroprudential policy.
1
The views expressed are those of the authors and should not be taken to reflect those of the BIS or De
Nederlandsche Bank. We would like to thank Itai Agur, Bill Allen, Claudio Borio, Maria Demertzis, Marvin
Goodfriend, Pierre Lafourcade, Iman van Lelyveld, Kasper Roszbach, Philip Turner and Haibin Zhu for helpful
comments and discussions, and Bruce Bowlin for excellent research assistance. The authors’ email
addresses are e.b.g.galati@dnb.nl
and richhild.moessner@bis.org.
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Macroprudential policy – a literature review
Gabriele Galati and Richhild Moessner
1 Introduction
The recent financial crisis has highlighted the lack of analytical frameworks to help predict
and cope with the global build-up of financial imbalances whose sudden unwinding turned
out to have severe macroeconomic consequences. With the benefit of hindsight, there has
been a fundamental lack of understanding of system-wide risk
2
. In particular, there has been
a failure to appreciate how aggressive risk-taking by different types of financial institutions –
against the background of robust macroeconomic performance and low interest rates –
supported a massive growth in balance sheets in the financial system. Overconfidence in the
self-adjusting ability of the financial system led to underestimate the consequence of the
accumulation of growing stocks of debt and leverage, which resulted from booming credit
and asset prices – most notably in the housing sector – and were reflected in historically low
levels of asset price volatility and risk premia. There was also insufficient recognition of the
role of financial innovation and financial deregulation in magnifying both the boom and the
unwinding of financial imbalances and their consequences on the real economy.
In terms of policy, the recent financial crisis has highlighted the need to go beyond a purely
micro-based approach to financial regulation and supervision. In recent months, the number
of policy speeches, research papers and conferences that discuss a macro perspective on
financial regulation has grown considerably. There is a growing consensus among
policymakers that a macroprudential approach to regulation and supervision should be
adopted:
“[…] we need a new set of macro-prudential policy tools which will enable the
authorities more directly to influence the supply of credit […]. These tools are
needed because credit/asset price cycles can be key drivers of
macroeconomic volatility and potential financial instability […].” (Chairman of
the UK Financial Services Authority, Adair Turner, 2010).
“To this microprudential base policymakers are adding a macroprudential
overlay to address systemic risk. This overlay has two important dimensions.
First, it seeks to ensure the stability of the financial system over time […].
And second, the macroprudential overlay addresses the stability of the
financial system at each point in time […].” (Deputy General Manager of the
BIS, Herve Hannoun, 2010).
Standard-setting committees have been tasked with working on macroprudential tools:
“Basel III represents a fundamental strengthening - in some cases, a radical
overhaul - of global capital standards. Together with the introduction of global
liquidity standards, the new capital standards deliver on the core of the global
financial reform agenda, and will be presented to the Seoul G20 Leaders
Summit in November.
The implementation of Basel III will considerably increase the quality of
banks' capital and significantly raise the required level of their capital. In
2
See e.g. Catte et al (2010).
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