Executive Summary

As countries design and implement macroprudential policies, they face the challenge of determining what—if any—changes need to be made to their legal and institutional framework to ensure that these policies are effective. Based on a review of experience, it is clear that there are a variety of approaches that can be taken by members, in light of the legal constraints and institutional preferences of each country. Whichever approach is followed, a number of issues need to be addressed when designing legislation in this area, both with respect to the substantive legal provisions and the allocation of institutional responsibilities. As background to “Key Aspects of Macroprudential Policy¹”, this paper provides an overview of these legal and institutional issues, while recognizing that macroprudential policy is an area that is still evolving.

With respect to the design of the substantive legal provisions, it is important that the underlying legislation include adequate provisions pertaining to:

• the objective of the macroprudential authority (or authorities), which is normally expressed in terms of “contributing to financial stability” or some variation of this phrase. Explicit objectives help guide the decision-making process and enhance accountability.

• the functions of the macroprudential authority (or authorities), which define the overall scope of responsibilities for the implementation of macroprudential policy. The key macroprudential functions include: (1) identifying systemic risks; (2) formulating an appropriate policy response; and (3) mitigating systemic risk through rule-making, supervision and enforcement. Given that it is unlikely that responsibility for macroprudential policy will be vested exclusively in one public authority, it is important that all key functions be allocated in manner that avoids gaps and inconsistencies.

• the powers of the macroprudential authority (or authorities) which, consistent with other areas of financial sector policy, should include powers: (a) to make rules (for example, by issuing regulations); (b) to collect information; (c) to supervise regulated entities; and (d) to enforce compliance with applicable rules. Given that powers enable a macroprudential authority to interfere with the rights of private parties, these powers need to be explicit and well-defined.

Regarding the allocation of institutional responsibilities, while the choices made by countries vary, there would appear to be two principal approaches.

• One approach involves vesting an existing authority with primary—but not exclusive—responsibility for the implementation of macroprudential policy. As noted in “Key Aspects of Macroprudential Policy”, monetary authorities are often given such a mandate. In some cases, the mandate is assigned to a separate decision making body within the monetary authority whose sole objective is the promotion of financial stability.

• The second approach is to allocate macroprudential responsibilities among different agencies and to establish a committee for the purpose ensuring adequate coordination. In some cases, the macroprudential committee will have decision-making powers that are binding on its constituent agencies and/or on market participants. In other cases, the committee will perform a coordinating function and will not have binding, decision-making powers.

Whichever of the above approaches is followed, the underlying law will need to address a number of issues, including (a) inter-agency coordination, (b) autonomy, (c) governance and (d) accountability and transparency.

Approved By

Sean Hagan