Systemic Risk, Crises, and Macroprudential Regulation PDF
Preview Systemic Risk, Crises, and Macroprudential Regulation
Systemic Risk, Crises, and Macroprudential Regulation Systemic Risk, Crises, and Macroprudential Regulation Xavier Freixas, Luc Laeven, and Jos é -Luis Peydr ó The MIT Press Cambridge, Massachusetts London, England © 2015 Massachusetts Institute of Technology All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher. MIT Press books may be purchased at special quantity discounts for business or sales promotional use. For information, please email [email protected] This book was set in Palatino LT Std 10 on 12 pt by Toppan Best-set Premedia Limited. Printed and bound in the United States of America. Library of Congress Cataloging-in-Publication Freixas, Xavier. Systemic risk, crises, and macroprudential regulation / Xavier Freixas, Luc Laeven, and Jos é -Luis Peydr ó . pages cm Includes bibliographical references and index. ISBN 978-0-262-02869-1 (hardcover : alk. paper) 1. Monetary policy. 2. Finance– Government policy. 3. Economic policy. 4. Financial crises. 5. Risk. I. Laeven, Luc. II. Peydr ó , Jos é -Luis. III. Title. HG230.3.F744 2015 339.5--dc23 2014034226 10 9 8 7 6 5 4 3 2 1 Contents Foreword vii Glossary xi 1 Introduction 1 2 A Primer on Systemic Risk 13 3 Systemic Risk: A Theoretical Framework 47 4 The Buildup of Financial Imbalances 73 5 Contagion 109 6 Systemic Risk and the Real Costs of Financial Crises 143 7 Measuring Systemic Risk 163 8 Systemic Risk and Microprudential Regulation 199 9 Systemic Risk and Macroprudential Regulation 251 10 Monetary Policy and Systemic Risk 291 11 New Challenges for Regulatory Policy 329 Appendix Data 367 Notes 395 References 417 Index 459 Foreword Macroprudential is the latest buzzword in economics. But it means different things to different people. For some, macroprudential policy is about managing the economic cycle. For others, it is about controlling financial stability stemming from systemic financial institutions. For others, it is simply an empty term. These skeptics hold the view that macroprudential policy has no teeth because the political economy of booms is such that financial regulators will always find it hard to smooth them, as booms bring large benefits (in the form of wealth and employment) while they last. Some go even further and claim that macroprudential policy may bring new risks when misused. Unfortu- nately, there is much confusion about what constitutes macropruden- tial policy and little agreement about how to operationalize it, in part because its objective is not clearly defined and in part because there is scarce historical experience about the use of macroprudential tools to gauge their effectiveness and calibration. Moreover the measurement and the theory of financial fragility and systemic risk of the financial system is still in its infancy, and there is little agreement on the scope of financial regulation and the institutional framework for macropru- dential policy. What are the strengths and limitations of the current prudential policy framework and how should it change? What are the differences between micro- and macroprudential policy? What is the boundary of financial regulation? Should it cover all institutions that engage in the provision of financial services? What are the limitations of current theories of financial fragility and systemic risk? And how can systemic risk be measured and monitored in real time? What lessons can be drawn from the history of the financial crises, including the most recent one, for the management of credit and asset price bubbles and bursts? How should macroprudential policy interact with macroeconomic policy? Is there any role for monetary policy for viii Foreword combatting systemic risk? Does macroprudential regulation always reduce excessive risk-taking or can it also encourage it? The purpose of this book is to offer a framework to operationalize macroprudential policy. We will define systemic risk and macropru- dential policy, discuss its differences with microprudential policy and its interactions with macroeconomic policies (notably monetary policy), and describe the macroprudential toolkit and experiences around the world with a view to operationalize macroprudential policy to fit to country circumstances (whether emerging economies or advanced economies). We conclude with a list of challenges in the implementa- tion of macroprudential policy and discuss its limitations. To our knowledge, this is the first and only book on this topic. By design, some topics are covered in more detail than others. This is in large part because our knowledge on these issues is still limited, as this is a new field. In particular, there is disagreement about the optimal policy mix and the measurement of systemic risk. And there is large uncertainty about the unintended consequences of macroprudential policy on systemic risk and the constraints imposed by polical economy forces. But there is much that we can offer, based on a growing body of academic and policy-oriented literature, the history of financial crises, and the limited historical experience with the use of macropru- dential policy. Moreover much has happened since the global financial crisis of 2008 to shape a new regulatory framework for deposit-taking financial institutions with a view to build a system of regulations that take a more macro perspective of the financial system with a focus on managing systemic risk rather than the risk of individual financial institutions, and macroprudential authorities have been established in a number of countries with responsibilities in the area of macropruden- tial policy. This book has grown out of our desire to offer clarity in an area of much confusion, drawing on our combined knowledge in this area based on academic research, policy and advisory work. Our focus is on the United States and Europe where much of the debate about mac- roprudential policy has centered, but we will also cover topics relevant to other parts of the world, including the role of macroprudential policy in managing foreign capital flows and the need for global coordination of macroprudential and monetary policies. But knowledge and sweat and tears from hard work alone cannot create a book. It requires close cooperation and team work, and the joy of working together, which in our case has translated into new Foreword ix friendships. Being physically located in different parts of the world did not help, but Skype and occasional trips offered solutions. A book like this one always takes more time than originally envisaged. This book would not have been possible without the continued support and pro- fessional editorial work of Jane Macdonald and Emily Taber at the MIT Press. The diligent editing work by Dana Andrus at the MIT Press and the editorial assistance from Maria Jovanovic and Patricia Loo at the IMF are also gratefully acknowledged. We would also like to thank Olivier Blanchard, Christian Brownlees, Charles Calomiris, Stijn Claessens, Charles Goodhart, Enrico Perotti, Raghu Rajan, and Fran R. Tous for commenting on earlier drafts of the book. The sometimes long debates with our colleagues and friends have markedly improved the quality of this book. Part of this book has been taught at the Barcelona GSE professional course on Systemic Risk and Prudential Policy that Xavier and Jos é -Luis organized and we thank all the participants (mainly from central banks and supervisory agencies) for all their comments and suggestions. Above all our thanks go to our families who gave us the precious time to work on this book. Jos é -Luis especial thanks go to his wife, Lambra Sa í nz Vidal, and his parents. The book was written while Luc Laeven was a staff member of the IMF. This book represents our own views, not those of the IMF or IMF Board. Barcelona and Washington, DC, November 2014
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