javier guzman calafell : groundbreaking shifts in the international financial system remarks by mr javier guzman calafell, deputy governor of the bank of mexico, during the conference “ groundbreaking shifts in the international financial system ”, organized by “ the us - korea institute at johns hopkins school of advanced international studies ” and “ the reinventing bretton woods committee ”, washington dc, 17 april 2015. * * * the views expressed in this document are strictly personal and do not necessarily coincide with those of banco de mexico ’ s board. i thank the organizers, and especially marc uzan, for the invitation to participate in this panel. the global financial crisis has been a painful reminder of the crucial importance of macrofinancial linkages for financial stability. in particular, it has shown how interactions between the real and the financial sector can give rise to “ procyclicality ” and thus to systemic risk, especially through their impact on the value of assets and leverage. it has also become evident after the crisis that common risk exposures by financial institutions, or the interconnectedness among institutions or markets, can also be a source of systemic risk. naturally, there may be a close relationship between both sources of systemic risks, and in fact they frequently arise simultaneously. the international community has made a major effort to take on board the lessons for financial stability deriving from the global financial crisis. thus, new bank capital, liquidity and leverage rules have been introduced under basel iii to reduce procyclicality and crosssectional systemic risks ; special measures have been designed for systemically important firms ; stress tests are conducted to make sure that banks can continue to operate under very difficult conditions ; accounting standards have been strengthened ; reforms have been introduced to address some of the risks related to the nonbank sector ; new standards for the financial infrastructure, with particular attention to the derivatives markets have been developed ; and in general a macroprudential approach for regulation and supervision has been emphasized. the measures implemented after the crisis have contributed significantly to mitigate some of the vulnerabilities that precipitated it. however, the challenges arising from macrofinancial linkages have not disappeared, and in fact a number of new risks have emerged. let me touch briefly on some of these issues. in the first place, notwithstanding the efforts made, some of the difficulties that surfaced during the crisis have not been fully tackled. • balance sheet repair of the non - financial sector in advanced economies is a case in

driven ), will no longer be very useful. 3 what is the appropriate policy response to the challenges posed by macrofinancial linkages? in view of the far reaching effects of monetary policy, the dominant view is that it is essential to use an instrument with more direct effects and with a systemic perspective of the financial system. consequently, the standard recommendation is to use macroprudential tools as the first line of defense. i share the view that macroprudential measures should have a prominent role in the pursuit of financial stability. but i am also convinced that we must be well aware of the limitations that we face in using these tools. to start with, despite the substantial increase in research on financial stability issues in the aftermath of the crisis, the theoretical foundations for macroprudential policy are at an incipient stage and still far from being able to provide the basis required to design integrated policy frameworks in this area. in addition, the interactions between macroprudential policies and measures in other fields, particularly monetary policy, should be carefully considered ; however, to date, they have not been sufficiently analyzed. also, since recognition of the role that macroprudential policy can play in financial stability is relatively recent, empirical evidence on the effectiveness of these instruments is scarce. furthermore, it is indispensable to establish adequate institutional arrangements for the design and implementation of macroprudential policies. it must also be considered that macroprudential policies do not affect activities not subject to traditional banking regulations, i. e. shadow banking is outside their reach. therefore, it is difficult to expect that financial stability can rely on the use of macroprudential policy alone. all the contrary, the complexity of this issue, and the uncertainties and limitations that surround the use of macroprudential instruments, imply the adoption of a comprehensive approach that includes, in addition to the latter, traditional monetary, fiscal and microprudential tools. it is also important to bear in mind that although normally this will not be the first line of defense, there will probably be instances where monetary policy will need to respond directly to financial stability risks. in view of close inter - country links, and the consequent global risks, international cooperation, be it through bilateral or multilateral means, based on either a preventive or a crisis - response approach, will frequently be an important component of the policy response. clearly, the financial system will have a healthier development in efficient economies