Front Matter

Front Matter

Steven Barnett, and Rodolfo Maino
Published Date:
April 2013
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    © 2013 International Monetary Fund

    Cataloging-in-Publication Data

    Joint Bank-Fund Library

    Macroprudential frameworks in Asia / edited by Rodolfo Maino, Steven A. Barnett. — Washington, DC : International Monetary Fund, c2013.

    p. ; cm.

    Includes bibliographical references.

    1. Financial institutions — Risk management – Asia.

    2. Banks and banking — Risk management – Asia. 3. Banks and banking, Central – Asia. 4. Financial crises – Asia — Prevention.

    5. Economic stabilization – Asia. I. Maino, Rodolfo, 1961–.

    II. Barnett, Steven (Steven Alan). III. International Monetary Fund.

    HG173.M32 2013

    • ISBN: 978-1-47551-719-4 (paper)

    • ISBN: 978-1-47555-007-8 (ePub)

    • ISBN: 978-1-47556-589-8 (Mobipocket)

    • ISBN: 978-1-47557-214-8 (Web PDF)

    Disclaimer: The views in this book are those of the authors and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its members.

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    Both Asian and advanced economies have learned from the 1997 Asian crisis and the 2008–09 global crisis the importance of financial stability and the need to prevent financial imbalances by active use of macroprudential policy measures. Most countries have now entrusted their central banks with either sole or shared responsibility for pursuing financial stability in addition to their traditional mandate of monetary stability.

    A central bank can pursue and maintain financial stability by preventing financial imbalances from building up; by reducing systemic risk arising from interlinkages, from common exposures, and from procyclicality of the financial system; and by discouraging risk-taking behavior of financial institutions that may have systemic implications. This may sound straightforward, but it is not.

    First, how does one define, identify, and measure financial instability?

    Unlike price stability, which can be clearly defined as the extent of price increases, measured and monitored using the inflation rate as an index, it is difficult to do so for financial instability. Financial indicators, indices, or even some early-warning data are mostly about individual risk or individual institution risk and may not be able to flag financial instability issues that are systemic in nature and have multiple dimensions.

    Second, how can we integrate the information or data into a formal model for vigorous analysis of imbalances or instability or the analysis and implementation of monetary policy, given the limited knowledge we have about the linkages between the real economy and the financial sector? How do we decide what tools to use and what the quantitative impacts of the selected tools are?

    Institutional constraints are another major challenge in mitigating systemic risk, especially if the responsibilities for micro- and macroprudential supervision do not reside in the same agency, and coordination between responsible agencies is not well established. How does one ensure effective and efficient coordination mechanisms for close consultation, coordination, and sharing of information of the micro- and macroprudential supervisors so that the interests of all agencies are well aligned and so that the necessary prudential measures can be implemented?

    From an emerging market’s point of view, there are some recommendations for the enhancement of financial stability:

    • Regularly monitor the threat of financial imbalances because they can lead to financial instability if left unchecked. The Bank of Thailand regularly monitors seven areas that are vulnerable to the buildup of financial imbalances, such as the housing and property market, the capital market, and the extent of indebtedness of various sectors.

    • Use macroprudential measures, which are powerful tools and have been widely used in emerging markets, to preempt the buildup of systemic risk. The most commonly employed macroprudential tools are the loan-to-value ratio, the debt-to-income ratio, and ceilings on credit or credit growth to address threats from excessive credit expansion in the system; limits on maturity mismatches; caps on foreign currency lending; and levies on noncore funding to address the key amplification mechanisms of systemic risk.

    • Capacity building in analytical skill and technical expertise for early detection of systemic risk is an urgent need. Staff members with the skill sets and competency for risk identification usually work in different departments in a central bank, such as examination, supervision, and economic policy. At the Bank of Thailand, we pool these staff members to form a working group, which meets regularly to assess the risk of potential financial instability building up. Although it is difficult to integrate the information or data into a formal model for rigorous analysis of imbalances, the dialogue and views form an important basis for policy formulation. No doubt, significant technical challenges remain and building up our knowledge base and technical expertise is necessary to better understand the complexity of maintaining financial stability.

    • Capital flows are posing a significant challenge for emerging markets. Although there are other policies to deal with capital flows, they are not always effective and may pose conflicts at times. Clearly, using monetary policy to cut interest rates to reduce interest rate differentials is not an option now because of the relatively robust economies in most emerging market, and some may even face the threat of inflation and imbalances. Inflows can lead to financial excesses and disruption can be even bigger when there is a reversal of the flows. It is important that emerging markets take steps, including macroprudential measures, to further strengthen their resilience and ensure that imbalances do not develop as a consequence of the inflows.

    • Appropriate monetary policy is a necessary condition for financial stability. It is now well accepted that monetary policy that keeps interest rates low for too long can sow the seeds of instability. If financial imbalances are building up because of accommodative monetary policy, changing the course of the monetary policy is the right approach. Macroprudential measures must not be used to substitute for the necessary adjustments to monetary policy to achieve financial stability.

    • There must be legal clarity in the mandates of micro- and macroprudential supervisors and clear procedures for coordination and information exchange between them, if they are not the same agency. In fact, even if both mandates belong to the same authority, which occurs when a central bank also has a bank supervision function, clarity is also very useful for ensuring effective implementation of policy measures for both mandates without concerns of conflicts of interest.

    • Outside interference and threats to central bank independence from having financial stability as a mandate can arise. Financial stability tools usually affect only certain economic sectors if financial imbalances are judged to be building up. Hence, central banks could face immense lobbying against and resistance to such measures. Therefore, proper legal provisions and governance structures need to be in place. At the Bank of Thailand, independence is carefully preserved:

      • First, monetary stability is the responsibility of the Monetary Policy Committee, whereas policy formulation and micro- and macroprudential supervision of the financial sector are under the Financial Institution Policy Committee (FIPC). Both committees are headed by the governor of the central bank. Two deputy governors also sit on each committee. For the sake of supervisory coordination, the heads of the Securities and Exchange Commission and Office of Insurance Commission also sit on the FIPC. The remaining members are outsiders, and outnumber internal members.

      • Second, the mandates of each committee are clearly spelled out in the law. Hence, the independence of each committee is legally guaranteed. Since the governor and deputy governors are in the minority, pressuring them would be futile interference. Because each outside member is proposed, based on his or her integrity, among other things, by the governor for selection by the board and is accountable by law for his or her decisions, the risk of external members being successfully interfered with is deemed minimal. So far, this governance structure has worked well.

    • What is most important in maintaining financial stability is the will to take away the punch bowl when the party gets interesting with monetary policy or macroprudential policy, which are unpopular measures. Without this will, any simple excuse can lead to delayed action or no action. Clear legal mandates and the governance structure discussed above make it somewhat easier for the relevant authorities to make tough decisions. In addition, during normal times, the macroprudential supervisor and the central bank need to have frequent communication with bankers and the general public to build acceptance that the boom-and-bust cycle is detrimental to economic well-being, and it would be in the best interests of all for the authorities to take unpopular measures when needed. It may sound highly idealistic and naive to hope for such acceptance, but with the memories of the global crisis still fresh, now is the best time for this strategy. The fact that most Asian economies have been able to safeguard financial stability with unpopular macroprudential measures may well suggest that they were able to get support from the masses who still remember the pain of the 1997 crisis. This is the case with Thailand, where there have been campaigns for prudent risk management on the part of households and the business sector, including banks and other corporations. Risk awareness and the willingness to trade short-term gains for long-term sustainability are much higher today.

    The last important message is to remember that the market only behaves according to the incentives in place. For example, monetary policy that is perceived by the public to remain accommodative for a prolonged period irrespective of economic developments provides fertile ground for financial speculation. Similarly, a policy that leads the public to believe that any asset-price burst will subsequently be supported by accommodative policy can fuel speculation. This is the issue of moral hazard, which policymakers must be very mindful of. Central bankers need to think about these long-term implications even in their pursuit of monetary stability. It is, of course, technically difficult to extend significantly the horizon of monetary policy, with our limited ability to see into the future. But without such awareness, the implementation of monetary policy may have significant adverse impacts in the long run.

    Tarisa Watanagase

    Former Governor of the Bank of Thailand


    In the aftermath of the 2008–09 global economic and financial crisis, important questions arose about the optimal design of financial stability institutions and how to implement macroprudential policies in a credible way throughout the cycle. Although the crisis left Asia relatively unscathed, Asian countries were already leading the way regarding the best ways to deploy macroprudential policies.

    Many Asian countries timely recognized that a single tool is unlikely to be sufficient to address the various sources of systemic risk. In their work on implementation issues, macroprudential authorities in the region tailored specific macroprudential instruments to particular vulnerabilities, including tools such as countercyclical capital buffers, variations in sector risk weights, dynamic provisioning, loan-to-value ratios, targeted restrictions on foreign currency lending, and liquidity requirements. Recognizing the importance of individual systemically important financial institutions (SIFI) and the systemic risk they convey, several jurisdictions in Asia even considered applying higher capital requirements on SIFIs to mitigate the risks of their potential failure.

    Although we are still at an early stage of implementation, many lessons can be derived from practice. Three crucial factors seem to be at the root of any successful policy implementation on the macroprudential front:

    • building a sound institutional framework by effectively identifying risks, providing incentives to take action in a timely manner to confront the arising risks, and facilitating the coordination of policies that affect systemic risk;

    • designing an analytical framework to monitor and assess systemic risk; and

    • establishing a system of international cooperation based on the recognized interconnectedness of financial crises.

    Two main themes across the many countries covered in the book should be underlined:

    • Macroprudential policy should focus on risks arising primarily within the financial system, or risks amplified by the financial system.

    • Macroprudential policy is not intended to address financial stability risks associated with macroeconomic imbalances and shocks, or inappropriate macroeconomic or structural policies—for which the first line of defense should be adjustments in macroeconomic policies.

    Moreover, critically important questions still include the following:

    • Do particular frameworks for financial stability institutions carry certain advantages in managing systemic risk and adjusting macroprudential policies, especially in such a volatile global environment?

    • How should macroprudential policies be coordinated with monetary and fiscal policies? How do countries ensure that macroprudential policies work in concert with credible frameworks for monetary and fiscal policy?

    • Which macroprudential instruments tend to be the most effective in containing systemic risk? Do countries have useful metrics for measuring systemic risk and for assessing the effectiveness of macroprudential tools?

    • Are rules-based macroprudential policies more effective than those applied with discretion? When are single instruments more effective and when should a country rely on multiple instruments?

    Answers to these questions are yet to be found. In the meantime, this book advances an excellent array of experiences from 13 countries in Asia and from some other latitudes as well—including Latin America and Israel—on these complex issues. We hope you will find this book insightful and a source of motivation to undertake further research on macroprudential tools and the institutional frameworks that can ensure their effective and timely deployment.


    The authors would like to thank the discussants at the Monetary Policy Workshop on Strengthening Macroprudential Frameworks—organized by the IMF Regional Office for Asia and Pacific with financing provided by the government of Japan—for their valuable contributions and, fundamentally, for ensuring a stimulating intellectual environment. During the workshop, held in Tokyo March 22–23, 2012, insightful papers were presented, which eventually made their way into this book.

    The editors are particularly grateful to the management team of the IMF Regional Office for Asia and Pacific, in particular Ms. Naomi Miyagi and Ms. Midoriko Yamaguchi, and its Director, Mr. Shogo Ishii, who promoted the original idea for this workshop and later provided encouragement and guidance to publish this book. We also wish to thank Ms. Tarisa Watanagase, former governor at the Bank of Thailand, for her support and opening remarks at the workshop. Special thanks and recognition are also due to the government of Japan for its generous financial support for this workshop.

    All the views expressed in this book are those of the respective authors and should not be interpreted as those of the International Monetary Fund.


    Rodolfo Maino and Steve Barnett

    The 2008–09 global financial crisis has placed Asia in a unique position. In the transformation of the global economy, Asia has been an economic powerhouse, standing at the helm of the global recovery.

    Asian economies managed to construct suitable macroprudential frameworks to contain the procyclicality of their financial systems and avoid the emergence of financial weaknesses and vulnerabilities. Asian macroprudential instruments and policies were used to complement the deployment of traditional macroeconomic policies to confront easy external financing conditions that were conducive to asset-price bubbles and credit exuberance. By dealing with the intersection of the real economy and the financial sector, macroprudential policies are becoming increasingly central, both in shifting the world out of the crisis and in preserving a stable environment to move toward stronger sources of growth.

    The Macroprudential Angle

    It is now broadly accepted that macroprudential policy should primarily address risks arising in the financial system and risks amplified by the financial system, leaving other identified sources of systemic risk to be dealt with by other public policies. Thus, a macroprudential strategy complements but cannot substitute for sound microprudential and macroeconomic policies. A macroprudential policy that is well coordinated with macroeconomic policies tends to be more effective in addressing systemic risk. Furthermore, macroprudential policy is better suited for targeting specific sectors, and should be used primarily to increase the resilience of the financial system.

    During the crisis, policymakers felt the urgency of building up a new macroprudential framework. And Asia led by example. Asian countries understood that capital flows presented a great opportunity for economic development and investment and growth but they equally entailed significant challenges, such as exchange rate overshooting, credit booms, asset-price bubbles, and financial instability.

    Timely detection of systemic risks—through market intelligence, information, and supervision—is of the essence for a pragmatic approach to financial stability (Nishimura, 2011). The Bank of Japan, for instance, has made efforts to use market intelligence to identify signs of risk accumulation. These efforts were complemented with regular comprehensive risk assessments of the overall financial system (by means of financial system reports) macro stress testing, and an innovative system of financial cycle indexes, which are designed as early warning indicators. These indices, which are based on traditional economic trends and cycles, have been useful for macroprudential policy design in Japan because they provide early warnings of the accumulation of risks.

    The chapters in this volume review policy tools and frameworks deployed by policymakers from Asia and the Pacific and draw lessons for the use of macroprudential policies. Macroprudential policy aims to support monetary policy objectives, safeguard the financial system, and limit financial sector systemic risk. Many Asian economies have been proactive in deploying macroprudential tools; therefore, it is particularly useful to study the experiences in the region. In particular, the book advances a better understanding of the interplay of macro- and microprudential tools with conventional monetary policy implementation, both in crises and normal times. It covers systemic risk identification and monitoring (with models and indicators), macroprudential instruments (what works better under specific circumstances), and institutional setup (who does what, and how to ensure accountability and coordination).

    The IMF’s Work

    The IMF has also understood the challenge of appropriately and timely addressing these vulnerabilities.1 In particular, the IMF is currently aiming at achieving a common understanding of the role of macroprudential policy in a broader public policy framework and guiding its membership on the design and implementation of macroprudential policy frameworks. Practical guidelines for putting macroprudential policies into operation have been recommended by the IMF, and include the following:2

    • Distinguishing good shocks (such as productivity gains) from bad ones (asset-price bubbles) is critical to avoid squashing healthy economic growth.

    • Credit and asset-price growth provide powerful signals of systemic risk buildup.

    • Using a combination of the LIBOR-OIS spread (difference between the London Interbank Offered Rate and the overnight indexed swap rate) and the yield curve could provide a signal of an imminent crisis.

    • Understanding the source of the shock is critical to being able to choose the correct set of macroprudential policy tools.

    • Macroprudential and monetary policies need to be deployed with an understanding of the basic source of shocks.

    An IMF working paper reviewed cross-country experiences in choosing and applying macroprudential instruments (Lim and others, 2011). Stressing that different types of risks call for the use of different instruments, the paper found that the following instruments may help dampen procyclicality: caps on the loan-to value ratio, caps on the debt-to-income ratio, ceilings on credit or credit growth, reserve requirements, countercyclical capital requirements, and time-varying or dynamic provisioning. In addition, limits on net open currency positions and currency mismatches and limits on maturity mismatches may help reduce common exposures across institutions and markets (Table 1).3

    Table 1.The Conceptual Basis of Macroprudential Instruments
    InstrumentConceptual Basis
    Caps on the loan-to-value (LTV) ratioThe LTV ratio imposes a down payment constraint on households’ capacity to borrow. In theory, the constraint limits the procyclicality of collateralized lending because housing prices and households’ capacity to borrow based on the collateralized value of the house interact in a procyclical way. Set at an appropriate level, the LTV ratio addresses systemic risk regardless of whether it is frequently adjusted. However, the adjustment of the LTV ratio makes it a more potent countercyclical policy instrument.
    Caps on the debt-to-income (DTI) ratioThe DTI ratio represents prudential regulation aimed at ensuring banks’ asset quality when used alone. When used in conjunction with the LTV ratio, however, the DTI ratio can help further dampen the cyclicality of collateralized lending by adding another constraint on households’ capacity to borrow. Like in the LTV ratio, adjustments in the DTI ratio can be made in a countercyclical manner to address the time dimension of systemic risk.
    Caps on foreign currency lendingLoans in foreign currency expose the unhedged borrower to foreign exchange risks, which, in turn, subject the lender to credit risks. The risks can become systemic if the common exposure is large. Caps (or higher risk weights, deposit requirements, or the like) on foreign currency lending may be used to address this foreign-exchange-induced systemic risk.
    Ceilings on credit or credit growthA ceiling may be imposed on either total bank lending or credit to a specific sector. The ceiling on aggregate credit or credit growth may be used to dampen the credit and asset-price cycle—the time dimension of systemic risk. The ceiling on credit to a specific sector, such as real estate, may be used to contain a specific type of asset-price inflation or limit common exposure to a specific risk—the cross-sectional dimension of systemic risk.
    Limits on net open currency positions or currency mismatchesSuch prudential regulation tools limit banks’ common exposure to foreign currency risks. In addition, the limits may be used to address an externality—sharp exchange rate fluctuations caused by a convergence of purchases and sales of foreign exchange by banks. This externality increases the credit risk of unhedged borrowers with heavy foreign currency debt.
    Limits on maturity mismatchThese prudential regulation tools may be used to address systemic risk because the choice of asset and liability maturity creates an externality—fire sales of assets. In a crisis, the inability of a financial institution to meet its short-term obligations because of maturity mismatches may force it to liquidate assets, thus imposing a fire sale cost on the rest of the financial system. The funding shortages of a few institutions could also result in a systemic liquidity crisis due to the contagion effect.
    Reserve requirementsThis monetary policy tool may be used to address systemic risk in two senses. First, the reserve requirement has a direct impact on credit growth, so it may be used to dampen the credit and asset-price cycle—the time dimension of systemic risk; second, the required reserves provide a liquidity cushion that may be used to alleviate a systemic liquidity crunch when the situation warrants.
    Countercyclical capital requirementThe requirement can take the form of a ratio or risk weights raised during an upturn as a restraint on credit expansion and reduced during a downturn to provide a cushion so that banks do not reduce assets to meet the capital requirement. A permanent capital buffer, which is built up during an upturn and drawn down during a downturn, serves the same purpose. Both can address the cyclicality in risk weights under Basel II based on external ratings that are procyclical.
    Time-varying or dynamic provisioningTraditional dynamic provisioning is calibrated on historical bank-specific losses, but it can also be used to dampen the cyclicality in the financial system. The provisioning requirement can be raised during an upturn to build a buffer and limit credit expansion and lowered during a downturn to support bank lending. It may be adjusted either according to a fixed formula or at the discretion of the policymaker to affect banks’ lending behavior in a countercyclical manner.
    Restrictions on profit distributionThese prudential regulation requirements are intended to ensure the capital adequacy of banks. Because undistributed profits are added to bank capital, the restrictions tend to have a countercyclical effect on bank lending if used in a downturn. The capital conservation buffer of Basel III has a similar role.

    Furthermore, because no single macroprudential instrument can deal with and respond to all aspects of systemic risk, a set of instruments must be used in combination with one another and in a complementary fashion with other macroeconomic policies. Calibration of these instruments requires a thorough technical answer before they are deployed, including potential trade-offs and costs of implementing these policies.

    “One size does not fit all” because arrangements need to incorporate local idiosyncratic conditions. Policies sometimes address specific areas or sectors, such as housing, and sometimes must deal with specific risks, such as credit or liquidity risks. Nier and others (2011) assesses the strengths and weaknesses of existing and emerging institutional models for macroprudential policy and provides broad guidance for institutional arrangements to support macroprudential policies in advanced and emerging market countries. The paper advanced a set of desirables to ensure broad consistency in IMF advice (Box 1).4

    Box 1.Key Desirables for Macroprudential Policy Arrangements


    • 1. The central bank should play an important role in macroprudential policymaking.

    • 2. Complex and fragmented regulatory structures are unlikely to be conducive to successful mitigation of systemic risk and should therefore be avoided.

    • 3. Participation of the treasury in the policy process is useful, but a leading role poses risks.

    • 4. Systemic risk prevention and crisis management are different policy functions that should be supported by separate organizational arrangements.

    • 5. A macroprudential policy framework should not become a vehicle for compromising the autonomy of other established policies. 6. Arrangements need to take account of country-specific circumstances.

    Provide for Effective Identification, Analysis, and Monitoring of Systemic Risk

    • 7. Mechanisms for effective sharing of all information needed to assess systemic risks should be in place.

    • 8. At least one institution involved in assessing systemic risk should have access to all relevant data and information. It should have the best existing expertise at its disposal to assess systemic risk.

    • 9. Mechanisms are needed to challenge dominant views of one institution.

    Provide for timely and effective use of macroprudential policy tools

    • 10. Institutional mechanisms should support willingness to act against the buildup of systemic risk and reduce the risk of delay in policy actions.

    • 11. A lead macroprudential authority should be identified and be provided with a clear mandate and powers, in a manner that harnesses the incentives of existing institutions to mitigate systemic risk.

    • 12. The mandate needs to be matched by sufficient powers, including to initiate the use of prudential tools to address systemic risk. Mechanisms should be established to expand powers when needed.

    • 13. The mandate should give primacy to the mitigation of systemic risk, but include secondary objectives to ensure that the policymaker takes into account costs and trade-offs.

    • 14. To guard against overly restrictive or inadequate policy, proper accountability and transparency need to be put in place, without unduly compromising the effectiveness of macroprudential policy.

    Provide for effective coordination across policies to address systemic risk

    • 15. Institutional integration of financial regulatory functions within the central bank can support effective coordination of macroprudential policy with monetary as well as microprudential policy, but also requires safeguards.

    • 16. Where institutional separation of policy decisions and control over policy tools cannot be avoided, the legal framework needs to assign formal powers to recommend or direct action of other policymakers.

    • 17. Where there is distributed decision making among several agencies, establishing a coordinating committee is useful, but may not necessarily be sufficient to overcome collective action and accountability problems.


    This book shows a committed quest by authorities in Asia to mitigate risks for central bank market operations stemming from short-term capital inflows and to reduce risks affecting both the real economy and the banking system. The book covers a wide range of topics on macroprudential policy.

    Chapter 1 deals with the institutional need for setting an optimal macroprudential arrangement. The chapter also presents some practical examples of institutional frameworks—in the Philippines and Mongolia—for financial stability that supports the development of a macroprudential policy function, including institutional boundaries between central banks and financial regulatory agencies and dedicated policymaking committees.

    • Jacek Osiński underlines that countries’ unique circumstances are critical to the consolidation of a macroprudential policy framework, among them, institutional factors (quality of existing institutional arrangements, legal traditions), political economy considerations (attitude toward concentration of political power), cultural issues, and resource availability.

    • Johnny Ravalo emphasizes that in the Philippines, the central bank aims to achieve financial stability by binding macroprudential, monetary, financial, infrastructure, and fiscal policies so that the systemic implications of transaction-level risks can be understood. He also warns of the need to have sharper tools, a harmonized view of managing and mitigating financial risks, and a commitment to cooperation and coordination to move forward effectively.

    • Recognizing that Mongolia’s economy is highly dependent on a few commodities and, thus, very vulnerable to procyclicality, Byadran Lkhagvasuren presents a case for adopting dynamic provisioning, provisioning on normal loans, caps on foreign currency lending, credit limits by economic sector, and time-varying capital requirements, although the approach requires regulators and policymakers to reconsider laws, codes, and regulations related to accounting and reporting.

    Chapter 2 presents examples of how some countries—Thailand, Hong Kong SAR, Indonesia, and Singapore—incorporate macroprudential instruments into monetary policy design, addressing alternative ways to formulate and effectively implement an optimal integration. The cases of Israel and Peru add additional background on the extent of substitutability in meeting the objectives of monetary and macroprudential policies.

    • Chayawadee Chai-anant illustrates the challenges for the Bank of Thailand in deploying macroprudential policy to address sectoral imbalances and in aligning monetary policy and microprudential regulation. The set of policies considered by the Bank of Thailand included tightened regulation of credit card loans and personal loans, parameters for net foreign exchange positions, loan-to-value ratios on mortgage loans, loan-loss provisioning, and a withholding tax.

    • In Hong Kong SAR, inflationary pressures and the increase in residential property prices raised concerns about the risk of credit-asset-price spirals. Against this background, Choi-Hoi Hui writes that the authorities put special emphasis on timely implementation of loan-to-value limits complemented by a special requirement for banks to hold regulatory reserves against latent credit risk.

    • In Indonesia, the post–global crisis era demands a strengthening of the monetary policy framework. Juda Agung argues that issues of procyclicality warrant an integration of monetary and macroprudential tools for countercyclical purposes with the aim of maintaining both price stability and financial stability.

    • This view is also supported by Barry Topf who, advancing valuable experience from Israel, states that macroprudential policy should be viewed in a broad context, tying together the two key goals of a central bank: price stability and financial stability.

    • The Singaporean experience outlines a clear example of targeted macroprudential responses. Ng Chuin Hwei explains how the deployment of macroprudential toolkits has focused on the housing market given the systemic risks transmitted through the credit and leverage risk channel and the asset-price inflation risk channel.

    • Presenting a valuable extraregional experience on the use of macroprudential instruments under dollarization, Renso Rossini emphasizes that the institutional macroprudential framework in Peru is not based in a formal mandate, but in coordination meetings to review risks and take actions to control them. Because of the partially dollarized financial system in Peru, the central bank relies on quantitative instruments to respond to early indicators of substantial and autonomous movements of liquidity and credit, which may generate systemic risks.

    Chapter 3 begins with Rodolfo Maino’s review of critical issues associated with measuring systemic risks. The chapter also appraises key elements pertaining to the implementation and deployment of macroprudential policies in the Republic of Korea, India, New Zealand, Bangalore, China, Cambodia, Indonesia, and Sri Lanka. Specifically, the chapter addresses the role of macroprudential policies in mitigating systemic risks and the need for enhanced cooperation and coordination, both domestically and internationally. Systemic risk is multidimensional and difficult to identify and measure, so effective macroprudential policymaking depends on filling information gaps and on effective coordination between macroprudential policy and other public policies. This coordination can be difficult in practice and needs to be coupled with mechanisms to avoid macroprudential policy being used as an inappropriate substitute for other public policies, especially monetary policy. Cross-border systemic risks and regulatory arbitrage underscore the critical importance of effective international coordination in identifying and measuring systemic risks.

    • Jun Il Kim underlines that real sector–financial sector linkages and cross-border connections suggest that a measurement of systemic risk should be able to capture the notion of interconnectedness and the complex interplay among market participants. In this regard, the Bank of Korea is addressing correlated risks and risk mismatches in various dimensions.

    • The use of time-varying risk weights and provisioning norms is also commonplace in India. Rabi N. Mishra illustrates the effective cooperation between regulators and the Reserve Bank of India with an analysis of interconnectedness between banks and other financial institutions in dealing with common and large exposures, capital movements, and other challenges to curb exuberance in specific areas and targeted sectors.

    • In countries like New Zealand, there is no compelling case for using macroprudential tools to address buildups in systemic risk or emerging financial vulnerabilities. However, Chris Hunt warns about the need to lay the groundwork for macroprudential policy and to pre-position the new instruments for when the next credit and asset-price boom occurs. To address the key risk represented by the unavailability of funding, New Zealand introduced a new liquidity policy focused on the core funding ratio, which defines a minimum level of stable funding to which banks must adhere.

    • The case of Bangladesh, summarized by S.K. Sur Chowdhury, shows a clear prioritization of fiscal and monetary policies amid a comprehensive macroprudential approach, dealing with foreign exchange market measures and supervisory oversight of risk-management practices.

    • Liao Min gauges the use of supervisory measures in China from a macroprudential perspective along with countercyclical measures adopted during phases of the economic cycle. In particular, he underlines how critical the process of formulating the policy framework for systemically important financial institutions has become in recent years.

    • Buy Bonnang Pal reflects on his views of the challenges and difficulties for Cambodia in articulating a collaborative effort among regulators for devising an effective macroprudential framework.

    • Increases in capital flow volatility and household debt are potential sources of systemic risk confronting Korea. These systemic risk factors in Korea have implications for procyclicality and expose the economy to systemic risk in the time dimension more than in the cross-sectional dimension. Tae Soo Kang describes how the Bank of Korea has deployed macroprudential measures, including dynamic provisioning, in recent years to address these risks.

    • Sukarela Batunanggar describes the four strategies Bank Indonesia has adopted to achieve a stable financial system, comprising microprudential supervision, macroprudential supervision, coordination and cooperation, and crisis management.

    • The analytical framework for monitoring and controlling systemic risk in Sri Lanka seeks to cover both the time dimension (dealing with credit cycles and procyclicality of the financial system) and the cross-sectional dimension (focusing on interlinkages and common exposures between financial institutions). Kumudhini Saravanamuttu summarizes Sri Lanka’s efforts to address these risks and to deploy macroprudential instruments in a timely manner.

    Good timing and the appropriate use of policy instruments are essential for dealing with any crisis. They are even more critical for preventing disruptions. To manage the procyclicality of financial systems, countries have numerous policy options in their toolkits—lower interest rates, reserves accumulation, tighter fiscal policy, macroprudential measures, and sometimes even capital controls. The appropriate answer always depends on the special circumstances at hand—there is no one-size-fits-all solution for addressing systemic risk. In the next pages, Asian countries are advancing examples of how to merge conventional macroeconomic policies and macroprudential tools to address the critical dual issues of price and financial stability. These efforts include building up an effective institutional framework, developing robust analytical toolkits, and closing information gaps. In the aftermath of the severe financial crisis of 2008–09, the Asian experience with the use of macroprudential toolkits is worth reviewing.


      Bank of England, 2011, “Instruments of Macroprudential Policy,Discussion Paper (London).

      Bank for International Settlements (BIS), 2010, “Macroprudential Instruments and Frameworks: A Stocktaking of Issues and Experiences,CGSF Paper No. 38 (Basel: Bank for International Settlements, Committee on the Global Financial System).

      Financial Stability Board, International Monetary Fund, and Bank for International Settlements (FSB, IMF, and BIS), 2011, “Macroprudential Policy Tools and Frameworks: Progress Report to G20” (Washington and Basel).

      Hahm, Joon-Ho, Frederic S.Mishkin, Hyun SongShin, and KwanhoShin,2012, “Macroprudential Policies in Open Emerging Economies,NBER Working Paper No. 17780 (Cambridge, Massachusetts: National Bureau of Economic Research).

      International Monetary Fund (IMF), 2011, Global Financial Stability Report: Grappling with Crisis Legacies (Washington).

      Lim, C., F.Columba, A.Costa, P.Kongsamut, A.Otani, M.Saiyid, T.Wezel, and X.Wu,2011, “Macroprudential Policy: What Instruments and How to Use Them? Lessons from Country Experiences,IMF Working Paper 11/238 (Washington: International Monetary Fund).

      Nier, Edward W., JacekOsinski, Luis I.Jacome, and PamelaMadrid,2011, “Towards Effective Macroprudential Policy Frameworks: An Assessment of Stylized Institutional Models,IMF Working Paper 11/2508 (Washington).

      Nishimura, Kiyohiko G.,2011, “Macroprudential Policy Framework from an Asian Perspective,speech delivered at the Asian Development Bank Institute/Japan Financial Services Agency ConferenceNew Paradigms for Financial Regulation and Macro Policies: Emerging Market Perspectives,” Tokyo, September 30.

      Terrier, Gilbert, RodrigoValdés, Camilo E.Tovar, JorgeChan-Lau, CarlosFernández-Valdovinos, MercedesGarcía-Escribano, CarlosMedeiros, Man-KeungTang, Mercedes VeraMartin, and ChrisWalker,2011, “Policy Instruments to Lean against the Wind in Latin America,IMF Working Paper 11/159 (Washington: International Monetary Fund).

    Other notable work summarizing macroprudential policy includes Bank of England (2011) and Hahm and others (2012).

    IMF (2011), in a chapter entitled “Toward Operationalizing Macroprudential Policies: When to Act” aimed to help policymakers to better diagnose systemic risk buildup and test the usefulness of indicators in predicting financial crises. The chapter illustrated how countercyclical capital requirements would operate—by accumulating capital when risks are building and drawing down this capital in a downturn.

    Further international guidance can be found in FSB, IMF, and BIS (2011) and BIS (2010).

    A review of policy tools used by Latin American policymakers can be found in Terrier and others (2011).



    Bank Indonesia


    Bank for International Settlements


    Bangko Sentral ng Pilipinas (Central Bank of the Philippines)


    China Banking Regulatory Commission


    Central Bank of Sri Lanka


    consumer price index


    debt to income


    Financial Stability Board


    Financial System Stability Committee


    gross domestic product


    Hong Kong Monetary Authority


    Bank of Indonesia


    investment fluctuation reserve


    International Monetary Fund


    loan to value


    National Bank of Cambodia


    nonbanking financial companies


    People’s Bank of China


    Special Administrative Region


    systemically important bank


    systemically important financial institution

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