Macroprudential policy
15 important questions on Macroprudential policy
What three pillar do we need for a strong banking union?
- Single supervisory Mechanism (Nov 2014). In order to supervise you first need a comprehensive assessment of the banks. (stress testing and asset quality review (AQR))
- Single Resolution Mechanism & Fund (2016)
- Single Deposit Guarantee Scheme (?)
What were the policies to en too-big to fail banks?
- Reduce probability of default (1. Basel III, 2. Macro-prudential buffers (additional buffers to protect for cyclical cash flows), 3. stress testing)
- Reduce the loss give default ( 1. development of recovery & resolution strategies. 2. enabling of bail-in(a bail in forces the borrowers creditors to bear some of the burden by having part of the debt they are owed written off.
What is a bail-in and how does it cover for bank failure? How much should it be?
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What is macro prudential policy? How does it differ from micro prudential regulation? 1. Policy objective, 2. Goal. 3. Risk characteristic, Correlations across firms, Calibration of prudential controls.
- Policy objective: Limit financial distress system ( micro: individual firms)
- Ultimate goal: Avoid output (GDP) costs linked to financial instability ( micro: consumer protection)
- Characterisation of risk: (Dependent on collective behaviour; endogenous (micro: independent of individual agents: exogenous)
- Correlations and common exposures across firms: important (micro irrelevant)
- Calibration of prudential controls: In terms of system wide-risk, top down (micro: in terms of firm risk: bottom up)
What are the the macro prudential instruments for the systemic risk of excessive credit growth & leverage? and trough which transmission channels do they operate?
- Counter cyclical capital buffers
- Time varying (Leverage ratio, Risk weights)
- Loan-to-value / loan-to-income caps
The transmission channel for counter cyclical capital buffers and Time varying leverage and risk ratios that the resilience of banks contribute to curbing excessive (sectoral credit growth). ???
The transmission channel for loan-to-value and loan-to-income is the resilience of borrowers and banks, mitigate pro-cyclicality mortgage credit.???
What are the key instruments and transmission channel of the systemic risk of excessive maturity mismatch?
- Stable funding restrictions (Net Stable Funding Ratio (NSFR) and (LTD)
- Liquidity charges
The transmission channel is the resilience of funding base to stressed outflows
What is the key instruments and transmission channel of the systemic risk of exposure to concentration?
- The Key instrument is large exposure restrictions ( by counterparty, sector, geographic)
The transmission channel is resilience to counterparty and concentration sectors
What is the key instruments and transmission channel of the systemic risk of exposure to TBTF?
- The key instrument is SIFI (systemically important financial institution) capital surcharges
The transmission channel: lower the probability and impact of failure of SIFIs; increased resilience of banks. There is a high loss given default so you want to lower the probability of default
There are a lot of examples or national macropruedential tools. Name 5 examples:
- Leverage ratios
- mortgage risk weight floors
- restrictions on trading activities
- systemic risk buffer largest banks
- limits for new lending (loan-to-value, loan-to-income
- Countercycilical Capital Buffers CCB (1-3%)
Why do banks in the Netherlands have particularly high LTV ratios?
- Banks in the Netherlands have long save assets (because of the hypotheek garantie stelsel)
- People have large defined benefit pensions
Why would it be inefficient to encourage people to have both a defined benefit pension and a house?
Why does debt overhang reduce labour mobility?
How does the boom-bust cycle impact intergenerational wealth distribution?
Looking at the credit cycles, would tat call for national or european macro-prudential policies?
What are the policy lessons we have learned so far from the crisis?
- national discretion needed for different structural risks
- Leverage ratio and risk weights: belt and suspender
- Avoid household debt problems before they arise (use LTVs)
- Excessive mortgages credit is a problem for households and the economy; less so for banks (Use LTV)
- Time-varying measures (Like CCB) can build buffers in upturns enhance resilience against downturns.
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