defined. Therefore, the more weight authorities intend to put on the latter objective (the ―leaning‖), the more discretion likely is needed.

Be it principally rule-based or discretionary, a countercyclical regime would require the authorities to select a set of indicators and establish continuous monitoring in order to identify systemic risk and gauge the timing and appropriateness of policy actions. Potential indicators<sup>12</sup> may include general economic conditions (such as GDP growth); credit conditions (such as credit growth, credit-to-GDP ratio, and lending standards); asset prices (such as property prices); banking sector performance and soundness indicators (such as bank profits, loan losses, and capital adequacy); credit and liquidity spreads; leverage of financial institutions, corporations, and households; and banking balance sheet structure (liquidity and currency mismatches). The selection of indicators will need to take account of the specific national context. Obviously, countries prone to sudden capital movements would need to monitor capital flows more closely, and those with heavy reliance on commodity trade would monitor commodity prices. Also, many developing countries are experiencing financial deepening and structural changes, which means that the interpretation of data may be different at different stages of development and that sectoral statistics may need to be examined in addition to aggregate statistics.

Some of the above-mentioned indicators tend to be lagging indicators, which makes them less useful in identifying systemic risk. Data capacity constraints, such as data gaps and reporting lags, make the monitoring even more difficult. Data collection and analytical capacity need to be upgraded in most developing countries as a precondition for effective implementation of countercyclical measures. Sometimes authorities in developing countries may have to continue to rely on market intelligence and expert opinions to supplement official data collection.

The focus on systemic risk implies that policy coordination and governance arrangements are of paramount importance in effective implementation of countercyclical measures.<sup>13</sup> On the one hand, most measures are an extension of traditional microprudential measures for macroprudential purposes, which means that prudential supervisors are best suited to enforce the measures. Prudential supervisors also possess supervisory information that is important for monitoring and identifying risk. On the other hand, countercyclical measures require increased focus on macro-financial conditions and systemic risk, and the monetary authorities may have a unique position in monitoring and analyzing these risks and the workings of the financial system, as well as the right incentives (since they will be responsible for cleaning up the mess if things go wrong). Another important consideration is how to put in place governance arrangements that can ensure the independence of analysis and decision-making.

> 12 For discussions on a variety of potential indicators and issues related to systemic risk identification, see Drehman and others (2010); IMF (2011a); and Moreno (2011).

> 13 The discussion in this section on governance arrangements of macroprudential framework draws on the findings of IMF (2011a) and BIS (2011). Also see Tucker (2011) for discussions on building financial stability institutions and the United Kingdom‘s experience with the Financial Policy Committee.

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