Bankruptcy

Macroprudentially Yours: A Literature Review

By Anna Gelpern

"Macroprudential" (policy, outlook, regulation, zeitgeist ... whatever ...) has been so in  of late, it threatens to beat out its cousin "Systemic" for the Random Overuse Award of the Century.  Worse, it is even trite to say that no one knows what Macroprudential is, or how to do things Macroprudentially:  macroprudentialists are totally hip to this line and have their talking points lined up ...  but in the end, you are still left wondering, if a little more sheepishly.  Nonetheless, I am convinced that the quest for macroprudential meaning is essential to design and implement viable financial reform.  There seems to be no better language to talk about interconnectedness, transmission, contagion, spillovers, and all the other scary crisis business at once.  This is why I was thrilled to stumble on this literature review from the ever-helpful folks at BIS.

I like the review for five reasons.  First, it validates my suspicion that the meaning of macroprudential is up for grabs, notwithstanding the recent policy activity (eg, FSOC, Basel III, G30).  Broadly defined, macroprudential regulation it is regulation for financial stability, but "financial stability" is itself hugely foggy.  The core problem seems to be the still-thin understanding of the link between finance and the macroeconomy, which the authors usefully contrast with the well-mapped (if occasionally contested) terrain of monetary policy.

Second, the authors do a nice job of identifying different strands of thinking among macroprudentialists:  for example, some are preoccupied with systems' vulnerability to external shocks, others with systems' propensity to generate shocks from the inside.  Some see asset price bubbles as the ultimate bad, others don't mind bubbles but focus on continuity of financial intermediation.  Thus "laws against bubbles" address one macroprudential worry, but do not exhaust the law's macroprudential dimension.

Third and related, the review is reasonably cognizant of the fact that law has a role to play in this universe, and one that is not limited to fixing bank capital adequacy and reserve requirements.  Studies of state laws regulating mortgage brokers are a nice example of the field's reach.

Fourth, the literature seems far from definitive on the choice between home and host regulation.  The effects of financial activity can reverberate in multiple directions; moreover, whether home or host regulation is "macroprudentially superior" depends in part on financial institutions' capacity to evade the laws of any given jurisdiction.  No going it alone in this world.

Fifth, the authors do a thorough job of cataloguing macroprudential methods and institutions in a handful of handy charts and pithy narrative.  Given the wave of eager policy adoptions, technical and institutional analysis is indispensable. 

Finally, without a number:  my own macoprudential conversion came by way of a table on page 6 of this BIS paper by Claudio Borio, which for me remains the best shorthand for the difference between old (micro) and new (macro) perspectives.  The fact that this literature review starts with my still-favorite table is heart-warming.

Full post as published by Credit Slips on February 20, 2011 (boomark / email).