Welcoming Remarks at the FSB RCG Americas Meeting
Rosanna Costa
Governor, Central Bank of Chile
7-8 October 2024
Santiago, Chile
Welcoming words
Good afternoon, and welcome to Santiago. It is my great pleasure to host this year's meeting
of the FSB Regional Consultative Group for the Americas, organized jointly by the Financial
Stability Board, the Financial Markets Commission of Chile and the Central Bank of Chile. Let
me extend a warm welcome to our distinguished guests, esteemed colleagues, and
participants. We are honored by your presence here today, particularly as we gather
together to address some of the most pressing challenges and latest developments in the
realms of financial stability, market development and regulatory coordination.
Allow me to especially acknowledge the presence of Mr. Klaas Knot, Chair of the Financial
Stability Board and Tiff Macklem and Kenneth Baker, Co-Chairs of the Regional Consultative
Group for the Americas, whose work and commitment have contributed greatly to shaping
our global and regional efforts aimed at enhancing financial stability.
I am also glad to extend a warm welcome to Mr. Rodrigo Coelho, Head of Policy
Benchmarking of the Financial Stability Institute, who will be our keynote speaker today,
whose expertise and perspective I am sure will provide us with key concepts and insights to
foster today's discussions.
Lastly, let me express my sincere gratitude to the organizing teams of the Secretariat of the
Financial Stability Board, the Financial Markets Commission, and our team in the Central
Bank of Chile, for their hard work and dedication that have been instrumental in making this
event possible.
The Role of Macro-prudential Policies and Institutional Arrangements
The topic of our seminar today-macro-prudential policy frameworks, and the coordination
and interaction of micro- and macro-prudential policies-is both timely and critical given
the increasing complexity of global financial markets and the emergence of risks whose
impact could become systemic.
In that regard, macro-prudential policy has become a crucial element to safeguard the
stability of the financial system by addressing the systemic risks that can accumulate across
financial institutions, markets, and instruments. While micro-prudential supervision focuses
on the soundness of individual institutions, macro-prudential regulation aims to prevent the
build-up of vulnerabilities that could lead to widespread financial distress, hence focusing
on potential systemic risk1/.
The origins of the term macro-prudential date back to the late 1970s, with the term
generally denoting a systemic orientation of financial regulation and supervision linked to
the macroeconomy. The objective of these earlier macro-prudential policies aimed initially
at achieving financial stability through smoother economic and financial cycles2. Under that
premise, several jurisdictions3 started implementing tools like Loan-to-Value ratios, Margin
Requirements and Dynamic Provisions.
However, it was not until the aftermath of the 2008 global financial crisis that international
organizations and regulatory bodies began to decisively develop, adopt, and implement
macro-prudential policies aimed at mitigating systemic risks that can accumulate over time.
This shift was informed by the crisis, which showed that, while traditional micro-prudential
approaches are essential, keeping individual financial institutions sound is not enough to
protect against unchecked system-wide risks and safeguard from systemic crises. Therefore,
policymakers need a broader approach and a toolkit to safeguard the financial system as a
whole.
The Basel III framework, as introduced by the Basel Committee on Banking Supervision
(BCBS), is a critical step in this direction, providing regulators with tools such as the
countercyclical capital buffer (CCyB) and liquidity coverage ratios that aim to enhance
financial system resilience during times of stress. The introduction of the CCyB incorporates
for the first time a macro-prudential tool within the Basel Standards, aimed at strengthening
the resilience and ability of the financial system to withstand shocks and to continue
providing financial services, without amplifying the original shock. In this context, Basel III
"directly addressed" the risks associated with the "procyclicality" of the financial system4.
The recent experience with the COVID-19 pandemic, showed that countries where CCyB was
activated and accumulated, had some advantages over others where the buffer was not
active, mainly by having greater room to liberate this capital buffer during a crisis that was
unrelated to a credit boom. Mounting empirical evidence shows that the release of capital
buffers worked as it supported the provision of credit.
This pandemic-driven experience with the usability of releasable capital buffers has sparked
an ongoing debate regarding the objectives and optimal implementation of tools like the
CCyB. There is still heterogeneity in the implementation of CCyB around the globe. Some
jurisdictions maintain it as originally intended, as a macro-prudential tool linked to the
financial cycle. Others have added a resilience-focused approach, informed by its use during
the pandemic. Additionally, more recently some jurisdictions followed an approach where
the tool is applied considering a positive cycle-neutral rate, that results in a capital buffer
that is available most of the time. Some of these countries left room for a more dynamic
application of CCyB over a neutral rate linked to the financial cycle.
In Chile, we have also moved towards the full implementation of the Basel III standards,
through the 2019 amendment to the General Banking Act, which introduced legal provisions
aligned with the Basel standards for the Chilean banking industry and allowed a degree of
flexibility so that, through regulations, the banking supervisor -in coordination with the
Central Bank- could implement the regulatory standards in force at the international level.
Currently, the near completion of the process of implementing these standards in Chile and
a broad number of jurisdictions, has not only strengthened the micro-prudential
requirements to boost individual bank solvency, but has also provided central banks and
supervisors with additional macro-prudential tools, like the Capital Buffers (capital
conservation and countercyclical capital buffers, CCoB and CCyB, respectively), to enhance
the resilience of the financial system, to help contain the buildup of systemic risks and
address structural vulnerabilities within the financial system5/.
However, having access to a tool and implementing it efficiently are two different things.
While the powers and possibility of use of a macro-prudential or micro-prudential tool may
be available, their effective application requires a deep understanding of the objectives and
their impact, as well as proper coordination with other active measures. Depending on the
financial regulatory architecture, this may also involve coordination among different
authorities. This necessary coordination cannot be achieved successfully without the
implementation of formal arrangements under the specific institutional frameworks of each
jurisdiction that suit the countries' specific circumstances6/.
The Role of Institutional Arrangements
The evolution of institutional arrangements to achieve the regulatory objectives and
promote financial stability is a topic that demands special attention, as we navigate an
increasingly complex financial landscape. In such a scenario, a narrow approach to
regulation is insufficient in addressing systemic risks. Consequently, macro-prudential
policies emerged as a key tool for safeguarding financial stability, complementing the
traditional approach of micro-prudential regulation7.
As I mentioned, the value of macro-prudential policies became particularly evident during
the COVID-19 pandemic, which tested the resilience of the global financial system. Unlike in
2008, the financial system was better capitalized thanks in part to the joint requirements
and actions implemented by micro- and macro-prudential authorities. During this time
macro-prudential tools played a significant role as a complement to monetary and fiscal
measures, helping to preserve financial stability and support the real economy during a
period of unprecedented uncertainty8.
However, it is important to bear in mind that the implementation of these measures that
bring additional resilience to the financial system is not without costs. Then, this entails
permanently evaluating in detail and balancing its benefits and costs.
The lessons from this crisis are still being processed. Several studies aim to provide empirical
evidence regarding the usability and impact of macro-prudential measures during the
pandemic, many focusing particularly on the effects that Capital Buffers had on the credit
channel. So far, the evidence suggests that Capital Buffers may help to strengthen banks'
solvency and mitigate the risk that banks' lending standards amplify an economic downturn
as well as all the spillovers implied. It also adds an additional "resilience" perspective over
instruments, like the CCyB, originally thought to act mainly over the financial cycle.
However, while macro-prudential policies have proved their worth during difficult times, the
challenge of coordinating them with other policies remains. Financial systems are
interconnected, and financial risks can easily spill across borders. Effective regulation,
therefore, requires a coordinated approach that integrates both macro- and micro-
prudential measures under a cohesive institutional framework.
Institutional arrangements need to support the regular exchange of information through
clear communication channels and decision-making processes that balance the potentially
conflicting goals of different regulators. The objective is to make the different measures
taken by regulators during time of stress more efficient and allow for a consistent
implementation of micro- and macro-prudential policies while mitigating potential
frictions9.
In that sense, the implementation of macro-prudential policies like the CCyB must
incorporate not only an overall assessment of the financial stability outlook and the
potential risks to it, but also a comprehensive evaluation of the level and composition of
regulatory capital of the banking industry as well as the capital requirements and other
prudential measures implemented by the micro-prudential authority. This evaluation must
carefully consider the potential impact of these requirements on banks' cost of capital and
the broader economic implications. The procedures with which to advance towards this
objective as well as the pending challenges in terms of coordination will be the main topics
of discussion at this workshop.
Conclusion: Looking Ahead
As we move forward, the future of financial stability will require a more holistic, integrated
approach to macro-prudential and micro-prudential policies. Institutional frameworks must
continue to evolve, becoming more adaptive and forward-looking, particularly as we
confront emerging risks like climate change and cybersecurity. Likewise, cross border
cooperation will continue to play a key role in the years ahead.
Strengthening the channels of communication between micro-prudential and macro-
prudential regulators, as well as between domestic and international bodies, is essential.
International cooperation is particularly important in today's globalized financial system.
Risks do not stop at national borders, and neither should our efforts to address them. The
work of the Financial Stability Board in promoting global standards and facilitating dialogue
among regulators is invaluable in this regard.
In the case of CCyB it is a crucial task to ensure a better understanding about the appropriate
balance between the macroprudential and the resilience approach. We have a unique
opportunity today to share the experiences and perspectives of different FSB members with
macro-prudential policies and how their institutional arrangements facilitated their
implementation and coordination with other regulatory measures.
But before we delve into that, we will first hear from our Keynote Speaker, Rodrigo Coelho,
on the role that institutional coordination arrangements can have in enhancing the
application of both macro-prudential and micro-prudential policies to foster financial
stability, particularly on the implementation of the CCyB and Pillar 2 requirements.
I encourage all of you today to engage deeply in the discussions that lie ahead. This meeting
is an opportunity to learn from each other's experiences motivated by our common goal of
strengthening the resilience of the financial system.
Thank you, once again, for your participation.
I wish you all a very fruitful rest of the day.