Prepared by an interdepartmental staff team from the Asia & Pacific; Legal; Monetary and Capital Markets; Research; and Strategy, Policy and Review departments, comprising V. Arora, K. Kochhar, J. Ostry, K. Habermeier, M. Goodman, N. Rendak, V. Chensavasdijai, A. Kokenyne-Ivanics, K. Kwak, and S. Sanya.
This note has benefited from an exchange of views between the IMF and OECD staff and input from the BIS and FSB. The OECD has prepared a separate note on their approach to the assessment of such measures.
See “The Liberalization and Management of Capital Flows—An Institutional View”, available at http://www.imf.org/external/np/pp/eng/2012/111412.pdf. CFMs comprise residency-based CFMs, which encompass a variety of measures (including taxes and regulations) affecting cross-border financial activity that discriminate on the basis of residency; and other CFMs, which do not discriminate on the basis of residency, but are nonetheless designed to limit capital flows. These other CFMs typically include measures, such as some prudential measures, that differentiate transactions on the basis of currency as well as other measures that typically are applied to the non-financial sector.
Input provided by the BIS refers to the October 2011 joint FSB-IMF-BIS report to the G20 on Macroprudential Policy Tools and Frameworks. The BIS recommends that macroprudential tools be classified operationally in terms of both their objective of limiting systemic risk and their governance. In particular, it suggests classifying a measure as macroprudential if and only if the measure was intended primarily to contain systemic financial risks and it was taken by the agency mandated to be in charge of macroprudential policy. The BIS regards these criteria as important for clarity of purpose and greater accountability, and in particular to avoid certain measures that may not be macroprudential from being characterized as such. The IMF’s 2013 paper “Key Aspects of Macroprudential Policy” (http://www.imf.org/external/np/pp/eng/2013/061013b.pdf) defines macroprudential policy as the use of primarily prudential tools to limit systemic risk, and it recognizes the importance of strong governance arrangements to help ensure the appropriate design and use of macroprudential tools. It states the institutional framework for macroprudential policy needs to assure willingness and ability to act to limit such risk, with the establishment of clear institutional mandates for systemic stability being a desirable part of the macroprudential policy framework. As the paper notes, in practice countries have adopted different institutional models to achieve their systemic financial stability objectives.
Measures that are both CFMs and MPMs can have a role in supporting macroeconomic policy adjustment and safeguarding financial system stability in certain circumstances, such as in response to a surge of capital inflows: (i) when the room for adjusting macroeconomic policies is limited; (ii) when the needed policy steps require time, or when the macroeconomic adjustments require time to take effect; (iii) when an inflow surge raises risk of financial system instability; or (iv) when there is heightened uncertainty about the underlying economic stance due to the surge.
Conformity with obligations under other agreements would continue to be determined solely by the existing provisions of those agreements.
This table is an illustrative list of possible measures that can be considered as both CFMs and MPMs, and is not a recommended or exhaustive list. The description and purpose of the measures provided under column II focuses on their use as CFMs/MPMs.
The IMF approach for assessing whether a particular measure is a CFM and an MPM is based on “The Liberalization and Management of Capital Flows: An Institutional View” and “Key Aspects of Macroprudential Policy” and the associated staff guidance notes, including the “Staff Guidance Note on Macroprudential Policy—Detailed Guidance on Instruments.” A measure is considered as both a CFM and an MPM when it is designed to limit capital flows in order to reduce systemic financial risk stemming from such flows. In practice, the IMF assessment of such measures has been guided by the provisions noted in the table, and also depends on country-specific circumstances, including the overall context in which the measure was implemented. Such measures can have a role in supporting macroeconomic policy adjustment and safeguarding financial system stability in certain circumstances, such as in response to capital inflows: (i) when the room for adjusting macroeconomic policies is limited; (ii) when the needed policy steps require time, or when the macroeconomic adjustments require time to take effect; (iii) when an inflow surge raises risk of financial system instability; or (iv) when there is heightened uncertainty about the underlying economic stance due to the surge.
The assessment of a specific country measure is guided by its bearing on the operations covered by the Code. Specifically, measures are to be assessed in a meeting of the Investment Committee on the basis of adherents’ obligations under the Code, notably under Article 2 of the Code of Liberalisation of Capital Movements to grant any authorisation required for the conclusion and execution of transactions and for transfers set out in liberalisation lists A and B. The further understanding among members on measures equivalent to restrictions extends liberalisation commitments to include measures which constitute disincentives for the conclusion of operations covered by the Code (see Users’ Guide: Measures constituting restrictions).