The case in favour of such an approach is that a known ‘reaction function’ allows market participants to organise their affairs and price risks in advance of episodes of dysfunction, avoiding over-optimism about the circumstances in which public support will not be forthcoming (incentivising appropriate self-insurance), and over-pessimism about when it would (allowing safe business to thrive). It may also provide confidence that the system is backstopped against operational or other idiosyncratic market-wide events, such as systemic IT outages. Similar arguments have been used to rationalise standing facilities for banks. Fourth, careful consideration would need to be given to who should have access to these tools, either directly or indirectly. Restricting such access to banks alone is unlikely to prove sufficient to stabilise core markets, given the increasing importance of the sorts of non-bank participants I discussed earlier. But access criteria would still be needed – to limit the financial risks to which public money is exposed; to ensure public insurance is not provided to firms who have not first taken steps to provide for their own resilience, or that of the wider system; and to ensure the sheer operational feasibility of any new tool.23 The quid pro quo between central bank access and meeting robust prudential standards is one of the key reasons why these discussions need to happen in parallel with those taking place at the Financial Stability Board. Fifth, and finally, the terms and conditions of such facilities will also need to be carefully calibrated to ensure those same risks are effectively managed.

In this context, macroprudential measures constitute only one of the many policy tools that will have to be used. Let me now turn specifically to macroprudential policies. One noted feature of the approach to deal with capital flows in the current cycle is the recognition that an effective and responsive prudential framework can help contain the build-up of financial risk and vulnerabilities that a boom in capital inflows typically generates. This includes the use of “microprudential” instruments to help keep individual banks strong, or to seek to contain system-wide risk through “macroprudential” measures. Policy tools to serve both purposes are many: all of which aim either at moderating procyclical financial behavior or at enhancing the banking sector’s resilience to shocks on both the asset and the liability sides. Drawing on Thailand’s recent experience on macroprudential policies, I would like to make three comments. First, it is important, in the context of public communication, to make a clear distinction that macroprudential measures are different from capital controls. Technically speaking, macroprudential policies apply to the calibration of regulatory measures from a system-wide perspective to dampen procyclicality arising from the interplay between the business cycle, the financial cycle, and risk-taking behavior of economic agents. Given such interpretation, measures to curb or discourage capital inflows should be considered as capital account measures and not macroprudential. For example, Thailand’s recent measure to reimpose withholding tax on non-resident investment in the bond market is a policy to discourage capital inflows. Second, macroprudential measures work by reducing systemic risk across the financial system.