Several economies have been using basic tools such as loan-to-value ratios and concentration limits on particular sectors. These tools are simple to understand and enforce. While their application to only particular sectors appears ad hoc, and a broader counter-cyclical capital buffer to reduce credit growth across the board might seem more appealing, the experience has been that an approach that is targeted towards sectors such as a real estate has the merit of not reducing credit to other sectors such as the corporate and SME sectors. Their efficacy probably stems from simplicity and consistent applications, which condition expectations in the market. 21. Fifth, the term “macroprudential” suggests that these are essentially prudential tools, but with a “macro-orientation”. Indeed, many tools that are “microprudential” in nature also serve the macro-needs as well. Loan-to-value ratios not only raise the buffer for losses but can also constrain credit growth in the economy. Similarly, macro-measures such as the tightening of interest rates can also lean against the build-up of asset prices and serve a microprudential purpose. Pursuing macroprudential objectives therefore does not mean that we have to have a narrow box of tools, each dedicated to a specific purpose. In fact, the interaction of various tools is significant – they can work in the same or opposite directions, and their cumulative impact may be greater or smaller than we anticipate. It is probably more appropriate for us to take an eclectic and holistic approach. 22.

The test of resilience of a bank or a system lies in its ability to absorb losses when a shock occurs – that is, its loss absorption capacity. For an individual bank, various tools, apart from surcharges or levies, should be considered. At the system level, adopting similar rules across institutions to prevent regulatory arbitrage should not inadvertently reduce the diversity in the global financial system. A variety of business models and investors with different risk appetites and liability-matching requirements may make for a more resilient system. 18. In the same vein, national regulators should explore a variety of approaches that are best suited to their conditions. Indeed, many emerging economies have banks that are systemic only in their local context, and national regulators need to consider how best to deal with these, even as we work together on global banks of systemic significance. 19. Third, post financial crisis, there is an understandable distrust of markets and supervisory judgment, and a preference to “hard-wire” most measures under Pillar 1 on capital. But we must not swing too far. Supervisors need to regain confidence and be prepared to exercise supervisory judgment – many economies have used macroprudential tools with some success by applying discretion. There is also scope for greater disclosure and market discipline under Pillar 3. Indeed, in the proposals relating to contingent capital – whether convertible bonds or bail-in arrangements, an understanding of the market dynamics relating to these instruments is crucial to their success. 20. Fourth, a sophisticated approach is not necessarily superior.