Fabio Panetta: Macroprudential tools - where do we stand?
Remarks by Mr Fabio Panetta, Deputy Director General of the Bank of Italy, during the
presentation of the 2013 Financial Stability Review, Central Bank of Luxembourg,
Luxembourg, 14 May 2013.
* * *
1. Introduction
I would like to thank the Banque Centrale du Luxembourg (BCL) for inviting me to this
conference. It is a pleasure to be here, and to discuss the challenges associated with the
implementation of macroprudential (MAP) policy. It is a very topical subject. The unusually
expansionary stance of monetary policy in the major regions is putting pressure on
asset prices and, in a context of weak economic activity and low inflation, may soon require
appropriate macroprudential measures. It is essential, therefore, to deepen our
understanding of MAP policy implementation and the optimal choice of MAP tools.
The debate on MAP policy that is taking place in academic and policy circles has produced
consensus on a few issues. First, macroprudential policy should aim to contain systemic
risk. However, this is by no means a univocal statement of objectives, as systemic risk has
multiple facets, and defies clear measurement. Even the usual distinction between the
cross-sectional dimension and the time-series dimension of systemic risk,1 although
conceptually important, does not provide an operational definition of the objective of MAP
policy. Second, MAP policies have important interactions with other policies, such as
monetary and fiscal policy, and microprudential policy. Yet, these interactions are largely
unexplored. Third, selected MAP instruments seem to have some effectiveness. However, the
experience gathered thus far on the use of these instruments is still limited, and refers
largely to developing economies.
This brief discussion suggests that in spite of the progress made, our understanding of
MAP tools and their impact on the financial system and the real economy remains very
incomplete. Several important questions await an answer. For example, when imbalances
emerge, should we prefer broad-based or narrow instruments? How to monitor and minimize
elusion? What definition of the various instruments (e.g. the LTV) should be used? Do MAP
authorities have the statistical information or the legal basis to implement MAP policies? The
European Systemic Risk Board (ESRB) recently found that, as of September 2012, only two
countries were fully compliant with its recommendation on the macroprudential mandate of
national authorities, suggesting that the answers to the previous questions are at best
unclear. Moreover, a survey on euro-area countries recently conducted by the Bank of Italy
indicates a surprisingly poor state of affairs concerning statistics on residential LTVs:
information is often of poor quality or even missing altogether. Definitions are barely
harmonized across countries.
Clearly, substantial progress is still necessary in this field. Given our limited experience, we
must rely on a learning-by-doing approach: start experimenting with MAP tools and
observe the consequences, focusing on (not-so-glamorous) technical details.
My comments today are devoted to operational issues. I will focus on three aspects in
particular. First, I shall briefly look at recent experience with MAP tools (Section 2). I will
then review some conceptual issues on the implementation of MAP tools (Section 3). In
Section 4 I will focus on operational challenges in the euro area. Conclusions are drawn in
Section 5.
2. Previous experience with macroprudential tools
Most of the previous experience in practical implementation of MAP policies relates to
emerging/non-G10 economies, such as South Korea, Brazil, Turkey, and several others.2
By contrast, experience in developed economies is very limited. Exceptions are Spain,
where dynamic provisioning has been applied since 2000; Switzerland, which recently
introduced countercyclical capital requirements; New Zealand, which has autonomously
applied a structural liquidity measure similar to the Basel III Net Stable Funding Ratio; and
the UK, where a fully-fledged operational framework for MAP policy has been set up and
the authorities are ready to start experimenting with countercyclical and sector-specific
capital requirements. Many other countries are likely to enter this uncharted territory, partly
in connection with the implementation of Basel III.
The non-advanced economies' lead in applying MAP policies is probably due to two main
reasons. First, these economies started pioneering MAP tools following the systemic
crises and severe financial instability episodes experienced since the 1990s. By contrast,
most developed countries started considering MAP tools only after the Global Financial
Crisis and in most cases have not yet used them in practice. With the benefit of hindsight, we
now know that the cushions accumulated in the run-up to the crisis (capital buffers, liquidity
reserves) were too small, so that when the crisis erupted there was little that policymakers
could do in the way of releasing instruments in a countercyclical fashion. In other words, in
many countries MAP policies were "at their lower bound", leaving little room for policy action.3
Second, the distinction between MAP measures and unsophisticated monetary policy
measures is often not clear-cut. At least some policies and tools that are labelled
"macroprudential" in emerging economies were de facto substituting for insufficiently
developed monetary policy frameworks. This, for example, is the case of reserve
requirements and quantitative limits on credit.4 Hence, the available empirical evidence
from emerging economies about MAP policy effectiveness may have to be interpreted with
caution.
This caveat notwithstanding, the available empirical evidence suggests that MAP tools do
have some effectiveness.5 Moreover, recent research conducted at the Bank of Italy
2
These countries experienced both time-varying and structural measures. For example, the Brazilian
authorities have experimented with capital requirements on new loans to households and reserve
requirements; Turkey with foreign- exchange intervention and policy-induced volatility on short-term rates (to
counteract large capital inflows), reserve requirements, LTV limits, and increases in risk-weights and general
provisions on new consumer loans. Korea has implemented LTV and DTI limits on mortgage lending, levies
on non-core foreign exchange liabilities and ceilings on banks' foreign exchange derivatives positions. Hong
Kong has also used LTV and debt servicing ratios and haircuts on share margin financing and repo
transactions.
3
P. Angelini, S. Nicoletti-Altimari and I. Visco (2013), "Macroprudential, microprudential and monetary
policies: conflicts, complementarities and trade-offs", in Stability of the Financial System - Illusion or
Feasible Concept?, edited by A. Dombret and O. Lucius, Edward Elgar, and Bank of Italy, Occasional Papers,
140, November (2012).
4
For example, in Italy, administrative controls on loans were used to steer monetary policy in the 1970s, when
there was no liquid money market. Reserve requirements were used to absorb excessive monetary base.
5
Among others, see G. Dell'Ariccia, D. Igan, and L. Laeven (2008), "Credit Booms and Lending
Standards: Evidence from the Subprime Mortgage Market", CEPR Discussion Papers 6683; G. Dell'Ariccia,
D. Igan, L. Laeven, and H. Tong with B. Bakker and J. Vandenbussche (2012), "Policies for Macroprudential
Stability: How to Deal with Credit Booms", IMF Staff Discussion Note 12/6; C.H. Lim, F. Columba, A. Costa,
P. Kongsamut, A. Otani, M. Saiyid, T. Wezel, and X. Wu (2011), "Macroprudential Policy: What Instruments
and elsewhere, also using theoretical calibrated or estimated models, finds that cooperation
between monetary and macroprudential policies in targeting financial imbalances may lead
to significant gains.6
All in all, in developed and emerging economies alike, there seems to be a lot to learn in this
field: about the true degree of independence of MAP tools from other policies; about the
independence of the various MAP tools from each other. And about some important
conceptual and practical issues that deserve attention to make MAP instruments fully
operational, an issue to which I turn in the next two sections.
3. Conceptual issues on the use of macroprudential tools
Lists of potential MAP tools have been drawn up by many authorities.7 The ESRB has put up
for internal use a list so exhaustive as to earn the label "the yellow pages". But nowhere
more than in this field is actual progress likely to come from a learn-by-doing approach.
Therefore, in this section I will focus on some of the issues that might challenge the effective
implementation of MAP policy, such as 1) the scope of application of MAP tools and the risk
of policy circumvention and leakages; 2) the possibility of symmetric (versus asymmetric)
impact of the MAP measures; and 3) the speed at which policy tools can be adjusted.
Finally, in Section 4 I shall discuss a number of operational challenges in Europe.
3.1 Scope of application of MAP tools: broad or targeted? Circumvention and
leakages
Broad versus targeted instruments. A first issue relates to the scope of application of MAP
tools. Some instruments are system-wide, and therefore well-suited to lean against the
build- up of imbalances or risks in the entire financial system. For instance, during a
generalized credit bubble system-wide countercyclical capital buffers, or liquidity and
reserve requirements, are likely to be effective in curbing the build-up of risks and
endowing the system with loss absorption capacity. However, they can be blunt tools to
counter a sector- specific overheating. In this case, the tightening required for a
systemwide tool to work would be unrealistically high, not cost-effective and rife with side-effects.
Targeted instruments may be more suitable for dealing with risks arising in particular
segments or subsectors of the financial system (examples are sector-specific capital
requirements, LTVs, and limits on foreign exposures).8 However, targeted measures tend
and How to Use Them? Lessons from Country Experiences", IMF Working Papers 11/238; G. Terrier,
R.O. Valdés, C.E. Tovar, J.A. Chan- Lau, C. Fernández-Valdovinos, M. García-Escribano, C. Medeiros,
M. Tang, M. Vera Martin, and C.W. Walker (2011), "Policy Instruments to Lean Against the Wind in Latin
America", IMF Working Papers 11/159.
6
P. Angelini, S. Neri, and F. Panetta (2011), "Monetary and Macroprudential Policies", Bank of Italy Working
Paper 801; Angelini, Nicoletti-Altimari and Visco, (2013), op. cit.; L. Gambacorta and F.M. Signoretti (2013),
"Should Monetary Policy Lean against the Wind? An analysis based on a DSGE model with banking", Bank
of Italy, Working Paper, forthcoming; S. Claessens, K. Habermeier, E. Nier, H. Kang, T. Mancini-Griffoli, and
F. Valencia (2013), "The Interaction of Monetary and Macroprudential Policies", IMF Policy Paper;
O. Blanchard, G. Dell'Ariccia and P. Mauro (2013), "Rethinking Macro Policy II: Getting Granular", IMF
Staff Discussion Note, 13/03.
7
The set of core instruments includes the countercyclical bank capital buffer, envisioned in the Basel III
regulation; changes in sectoral risk weights, a tool recently assigned to the UK Financial policy committee;
limits on loan-to- value, on debt-to-income ratios; and so on.
8
The scope of the instruments can be very narrow, to the point that one may question whether they are
really macroprudential in nature. For example, in Korea LTV limits were envisaged for mortgages in
specific areas of Seoul, where real-estate conditions were considered speculative. See D. Igan and H. Kang
(2011), "Do Loan-to-Value and Debt-to-Income Limits Work? Evidence from Korea", IMF Working Paper
11/297.
to be more prone to two related problems: circumvention/elusion and leakages/waterbed
effects.
Circumvention/elusion occurs when the agents to which the policy measure is directed
find ways to mitigate or even neutralize it. Leakages/waterbed effects arise when the agents
to which the measure is directed are fully affected, but other sectors are also affected and
adjust their behaviour so as to contain the impact of the measures. Due to these effects,
MAP policy can at best lose effectiveness; at worst, it can exacerbate imbalances in parts of
the system.
Circumvention/elusion. Macroprudential tools and policies are prone to circumvention, but
this is also true of most regulation. Is there anything that makes MAP tools different? Two
remarks are in order.
First, the problem of circumvention tends to be more acute when MAP measures are
targeted. A few examples may help to clarify this claim. First, consider the case of LTV limits
on mortgages. Faced with these limits, banks may use alternative products, such as
personal loans, to expand their real-estate exposure beyond the established limits, reducing
the measure's effectiveness. Similarly, intermediaries may circumvent sector-specific capital
requirements by extending personal loans to entrepreneurs rather than to their firms,
hence avoiding additional capital absorption. By the same token, borrowers may elude limits
on the debt-to-income (DTI) ratio by tapping multiple lenders, who have no way of
controlling circumvention unless a central credit register is in place. Even where such an
infrastructure exists, the borrower would still be able to elude the limit by having other
household members apply for the loan.
Finally, consider also the case of instruments targeted to maturity mismatches, such as the
limit on long-term foreign currency lending established in South Korea in the 1990s: at least
70 per cent of foreign-currency loans with maturity above 3 years had to be matched
by foreign currency liabilities with the same maturity threshold. As Korean banks had little if
any access to long-term foreign currency funding, they entered funding contracts with
maturity of 3 or more years but with early reimbursement clauses, so that in practice the
maturity was much shorter (1 year or so).9 This allowed them to borrow at relatively cheap
rates, formally complying with the regulation but de facto eluding it.
My second remark is that elusion is more likely to occur during cyclical upturns. Consider
again one of the above examples: lenders know well that the credit risk of lending to an
entrepreneur is the same as that of lending to his/her firm. When optimism prevails and risk
aversion is low, they will be more willing to overlook prudency. Indeed, elusion requires
lenders and borrowers to collude, and this tends to be more likely in the positive phase of
the business cycle, exactly when the tightening measures should be taken. As I shall argue
below, this may have consequences for the effectiveness of MAP policies over the cycle.
Leakages/waterbed effects. A related problem is the risk of leakages (or waterbed effects),
which occur when MAP policy measures propel imbalances elsewhere in the system. This is
also a special case of the tendency of regulation to push activity towards the less
regulated part of the financial system (such as the shadow banking system). But the
effect may also arise within the regulated financial system. For example, in the UK, between
1998 and 2007, the resident branches of foreign banks - which unlike subsidiaries, are
not subject to host country regulation - increased lending in response to tighter capital
requirements on domestic regulated banks, thereby offsetting about one third of the
tightening manoeuvre.10 The reciprocity arrangements included in the Basel III package
and the CRD-IV/CRR package address the waterbed effect for the Countercyclical Capital
Buffer, although other tools remain uncovered by formal reciprocity provisions.
What are the solutions? What, if any, are the solutions to circumvention and waterbed
effect? There clearly is no silver bullet, but policies can help to mitigate problems.
First, effective micro supervision can go a long way towards addressing circumvention. In
particular, a system that relies heavily on on-site inspections would create a strong deterrent
against elusive behaviour. Refer to one of the above examples, in which a bank uses
personal loans to elude sector-specific capital requirements or LTV limits: on-site
inspections would very likely uncover this behaviour. Effective supervision would also alert
the authorities to waterbed effects, allowing them to take swift corrective action. While
effective supervision and extensive on-site inspections are costly, for both the supervisor and
the intermediaries, the crisis has demonstrated that the cost of inadequate supervision can
be huge. To the extent that elusion requires collusion between lenders and borrowers,
onsite supervision should be intense also during positive phases of the business or financial
cycle.
Second, in response to elusion and waterbed effects, authorities may broaden the scope of
their policies, e.g. with the simultaneous use of complementary macroprudential tools,
rather than a single targeted tool. The possibility to circumvent an LTV limit could be
substantially reduced if it were used together with a DTI limit consolidated at borrower level.
In fact, while the former would limit the loan exposure relative to the collateral value, the
latter would constrain the level of overall lending to each given customer based on his/her
income. A similar argument can also be made for the sector-specific capital requirements and
DTI.11
Third, authorities can extend the perimeter of regulation dynamically in order to include
segments of the system that have become systemically relevant (UK legislation has
granted this power to the FPC).12 In this respect, the comprehensive approach adopted in
Italy - where all financial intermediaries are subject to supervision, with appropriate
proportionality - has some merits.13
Finally, it should be clear from the above examples that effective cross-border cooperation
among authorities is another important method of fighting spillovers. My assessment is that at
present, unfortunately, centrifugal forces seem to prevail, in Europe as elsewhere.
3.2 Is the functioning of macroprudential tools symmetric or asymmetric?
Another issue to address in order to make MAP tools operational relates to their symmetric
or asymmetric effectiveness along the financial cycle. The premise is that MAP measures
are effective if and only if they impose - or remove - economically binding limits, that is, if
they are more stringent than the constraints imposed on intermediaries by voluntary
decisions or by market pressures. For example, if during recessions risk aversion or market
pressures raise banks' desired capital ratios above regulatory thresholds (a situation
that applies to many economies in the current environment), a policy of releasing capital
constraints (e.g. via the countercyclical buffer) would have no effect:14 the authority would
find itself pushing on a string. This reasoning suggests two considerations.
First, MAP tools should in principle be more effective during upswings of the financial cycle:
when optimism prevails, market constraints are weaker and banks typically hold less
excess capital or liquid buffers. However, as already mentioned, during such times
incentives towards elusion are likely to be stronger. These two offsetting effects make it
hard to gauge whether MAP instruments are more effective during upturns than downturns.
Second, for an effective release of some MAP tools in bad times, there must have been an
adequate tightening in good times. This is vividly illustrated by the behavior of capital ratios
during the current crisis. Large banks, typically endowed with thin capital buffers, reacted to
the downturn by increasing capital procyclically. By contrast, small banks, which entered the
crisis with large capital buffers, effectively acted as stabilizers. There is clear evidence of this
behaviour for both the US and the European banking systems (see Figure 1).15
The IMF has recently analysed the degree of symmetry of MAP policies, without reaching
firm conclusions. In the 36 countries examined, between 2000 and 2011 the cases of policy
tightening far outnumbered the episodes of loosening. Most of the loosening measures,
often consisting in the relaxation of previously tightened instruments, occurred after 2008.
The econometric exercise is inconclusive on whether MAP measures have symmetric or
asymmetric effects, but the results have to be interpreted with caution, as the incidence
of loosening events may be too small to detect statistically significant differences.16
3.3 Adjustment of policy tools: speed, size
The speed at which policy tools can be adjusted also deserves attention. In the Netherlands,
a recent decision by the government (contained in the 2012 Stability Programme) forsees a
gradual lowering of the maximum LTV ratio from 106 per cent in 2012 to 100 per cent. The
decline is expected to take place at a pace of about 1 percentage point per year. As a
comparison, in Italy the average LTV declined by almost 10 percentage points from 2006
to 2012 - about 1.6 percentage points per year. This is a much faster adjustment - note that
it was not driven by the regulator, but by banks' autonomously adopted policies. What is
the right adjustment speed? A look at housing market cycles provides insights in this
respect. Both upturns and downturns in housing cycles in advanced countries last on
average around 5 years.17 This suggests that the tightening pace adopted in the
Netherlands might be too slow, with risks that the countercyclical policy could be fully
effective only at the turning point of the cycle. This is not a criticism;18 I just mean to illustrate
a general point. My assessment is that our knowledge in this area is particularly poor, and
that we must make the most of the empirical evidence that will accumulate from future policy
experiments.
The speed of adjustment is clearly related to the size of the adjustment. For example, the
countercyclical capital buffer will have to be managed taking into account that an increase,
say, will affect all banks at the same time. Therefore, a sudden, sharp increase could
15
S.G. Hanson, A.K. Kashyap, and J.C. Stein (2011), "A Macroprudential Approach to Financial
Regulation", Journal of Economic Perspectives, 25(1): 3-28 and Angelini, Nicoletti-Altimari and Visco (2013),
op. cit..
16
E. Nier, H. Kang, T. Mancini-Griffoli, H. Hesse, F. Columba, R. Tchaidze, and J. Vandenbussche (2012),
"The Interaction of Monetary and Macroprudential Policies - Background Paper", IMF Policy Paper. The
analysis suggests that the effect on credit growth of changing the reserve requirement is stronger when
loosening than when tightening. On the other hand, the effect on house prices of changing LTV ratios is
stronger for tightening than for loosening. For the other macroprudential tools considered there is no significant
difference.
17
S. Claessens, A. Kose, M. Terrones (2011), "Financial Cycles: What? How? When?", IMF Working Papers,
11/76.
18
The policy move in the Netherlands may be structural in nature, since LTVs exceeding 100 per cent are
probably questionable apart from cyclical considerations.
send many banks scrambling for funds at the same time, generating a system-wide
dearth of capital. Of course, this makes this tool potentially very powerful.
4. Operational challenges in Europe
Let me now turn to two practical aspects in the implementation of macroprudential tools on
which significant progress is required, with a focus on Europe.
4.1 Gaps in the statistical framework
One not very glamorous but key issue is the question whether statistical reporting is
adequate to help ensure policy implementation and instrument effectiveness. Consider the
housing market. Housing market cycles differ substantially across countries (Figure 2),
suggesting that MAP policies aimed at curbing problems of overheating in the
realestate sector should be tailored to the national situation. The regulation being finalized in the
EU (CRD-IV/CRR) properly allows for national leeway. In line with this evidence, a
recent survey among euro-area NCBs, conducted by the Bank of Italy and presented in
our latest Financial Stability Report, shows that there is substantial dispersion of average
LTV ratios in the euro area.19 Ratios on new loans in 2011 ranged from below 60 per cent in
some countries to more than 100 per cent in others (Figure 3; one must bear in mind that
LTV is not yet a MAP instrument in most EU countries).
There is also significant heterogeneity in the underlying statistics. For example, the survey
just mentioned showed differences with regard to the LTV definitions and the methods of
collecting and aggregating data across Europe. Should the value of the real estate be
recorded at mortgage issuance? Or, should it be updated? If so, how? Should there be
a difference between first homes and other houses? The list could continue. Each different
answer to any of these questions may give rise to methodological differences in
computed LTVs. These discrepancies hamper cross-country comparisons; going forward,
they can hinder MAP implementation and coordination among the euro-area countries. Work
to harmonize statistics in this field is beginning in the light of the forthcoming establishment
of the Single Supervisory Mechanism (SSM).
Consider next non-performing loans (NPLs). These are arguably key pieces of information for
micro as well as for macroprudential policies. But lack of a harmonized definition, even at the
European level, prevents robust cross-country comparisons. As an example, the definition
used by Italian banks - which is set by the Bank of Italy - is generally broader and more
rigorous than elsewhere in Europe.20 Our analyses show that, controlling for differences in
the way collateralized positions are treated in the definition of NPLs, Italian banks would
display on average substantially better NPL and coverage ratios (Figure 4). Also, the
dynamics of the two ratios would change substantially: whereas the official coverage ratio
decreased by 1.5 percentage points between 2009 and 2012, the "adjusted" ratio (computed
according to the methodology used by a sample of large European banks) would increase
by 3.3 points. What is more, this is just one of the factors affecting cross-country
comparison of NPLs. Other differences emerge, e.g. with respect to the definition of
restructured loans. A cross-country comparison that fails to take these methodological
problems properly into account would be misleading. The issue is clearly thorny, because
changing well-established national practices to converge to a uniform standard entails
adjustment costs, which generate resistance. The asset quality review that planned under
the developing SSM should address these problems.
A last example concerns indicators of banks' funding/liquidity conditions. For lack of
data, the funding gap is often approximated by the loans-to-deposits ratio (this was
standard practice in the IMF GFSR until recently, and it still is in the FSR of the
European Central Bank). However, correct measurement of the gap should consider all
sources of retail funding, including bank bonds subscribed by retail customers (which proved
to be as stable as retail deposits). Given large cross-country differences (for example, retail
bonds are an important source of funding in Italy, but not in other countries), the use of
rough measures, sometimes induced by lack of publicly available data, may misrepresent
the true funding conditions of banks in some countries and alter international comparisons
(Figure 5).21
4.2 The institutional framework in Europe
A full assessment of the institutional set-up for MAP policy in the European Union is
premature, also in the light of the implementation uncertainties for the SSM. However, it is
clear that the various reforms and regulations introduced have produced a very complex
framework. An effort is necessary to minimize inefficiencies and foster an effective interaction
among the different actors involved. Several key issues remain to be addressed.
The first has to do with the respective roles and powers of the SSM and the National MAP
Authorities (NAs). The legislation being finalized (CRD-IV/CRR and the SSM Regulation)
gives asymmetric powers to the two parties, with the ECB able only to tighten
macroprudential tools above the regulatory minima and the NAs empowered to implement bi-
directional policies. At the same time, however, a symmetric feature is also envisaged by
the rules: the ECB can object to policy decisions taken by the NAs, which will in turn have
to "duly consider" any such objections; the NAs can do the same with regard to ECB's
decisions, and the ECB has also to "duly consider" the NAs' objections. As for this symmetry
of "objection" powers, it remains to be seen who will have the final say if the objections are
not duly taken into account. Without a tie-breaking mechanism, the risk of a stalemate
seems by no means negligible.
A related issue is that of cooperation/coordination between the SSM and the NAs. This is
explicitly addressed only for the tools included in the CRD-IV/CRR package. It is essential
that work continue on the definition of a coordination framework also for instruments
currently excluded from the European regulation, such as the LTV or the DTI ratios, as an
equilibrium relying mainly on authorities' good will could turn out to be unstable. Such a
framework would help address the risk that measures taken with a purely domestic
perspective have negative spillovers on other countries.
A final issue concerns the interaction between the ESRB and the SSM, which is also likely to
be complex. Should the ESRB be strengthened and made more independent from the ECB-
SSM? Or should it be kept as a lean institution, in charge of coordination among SSM
countries and other EU countries, and among central banks and supervisory authorities
not represented in the SSM? The debate is in its early stages. Much will depend on how
many EU countries join the SSM. While each solution has its pros and cons, the risk of an
overcrowded arena in the MAP field is material.
To maximize the effectiveness of the MAP framework in Europe, a principle that should be
heeded is that strong microprudential supervision is a necessary precondition for effective
macroprudential policy. Indeed, MAP policy is to a large extent the use of microprudential
tools with a macro perspective. It is therefore crucial to coordinate the use of prudential tools
for both purposes. As an example, consider the actions that the Bank of Italy recently
undertook with the aim of increasing bank provisioning, in order to improve investor
confidence in Italian banks. With a macroprudential perspective, in order to avoid
procyclicality the Bank of Italy at the same time asked banks to increase
internallygenerated resources by containing costs, disposing of non-strategic assets and aligning
dividend policies to their balance-sheet and income strength. These actions should limit
the risk that, in a context of weak economic activity and tight credit conditions, the
increase in provisioning might lead to a deterioration in the availability of credit to the private
sector.
5. Conclusions
Macroprudential policy may play a crucial role in preserving financial stability. But in this new
field of policymaking, more than in others, we should keep in mind that no solution is
obviously right or wrong. More experience is needed on the functioning of macroprudential
authorities and the use of tools. As progress will inevitably follow from a learn-by-doing type
of approach, policymakers should not shy away from carefully planned but bold experiments.
Some countries are already moving in this direction. The signs of overheating that are
emerging in some segments of the financial system may soon require appropriate
macroprudential measures. Policymakers should not repeat the errors made in the run-up
to the crisis, when many supervisors turned a blind eye to the imbalances that were building
up in their economies.
Some conceptual steps need to be taken. First, elusion and waterbed effects may hamper
the effectiveness of MAP policies, especially when measures are narrow. A system of tight
micro supervision can go a long way towards addressing circumvention. The
simultaneous use of complementary macroprudential tools, rather than a single targeted
tool, can also help. Effective cross-border cooperation is key to fight spillovers.
Unfortunately, at present centrifugal forces seem to p