Time varying macroprudential regulation: Some open issues

This note discusses some critical issues in the setting dynamic of macroprudential regulation. The first critical issue is that the rationales underlying the implementation of dynamic measures are not completely clear and consistent. The overall aim of these measures is obviously to reduce the level of systemic risk, by dealing with the potential externality and negative shocks on the system that the failure of one or few institutions or the correlation of shocks across institutions because of excessive swings in financial and real cycles might induce. The initial aim of countercyclical measures was to strengthen the resilience of financial institutions in downturns. This evolved into also targeting financial market booms and avoiding excessive gaps of asset prices (and supply) from their long term trends. These two objectives can of course be reconciled within a single policy framework, as far as CCBs are able to be activated symmetrically in upturns as well as in downturns. The increasing focus on financial stability and bubbles implies that much more attention has been given on rules for the building up of capital in upturns than for its release in downturns. The second critical issue relates to the discretionality in applying these measures. It is indeed evident that countercyclical measures cannot be just triggered automatically when indicators reach pre-defined thresholds. On the other hand, large discretion on behalf of the regulator creates much uncertainty in the financial market, particularly because CCBs are ‘slow release’ measures, as it takes time to implement them. The third critical issue pertains to the identification of the indicators to  be used to activate the time varying measures. There is still lack of a consensus on a common framework for setting CCBs, particularly for what concerns the set of indicators that should trigger the dynamic measures proposed by the academic literature and by policy documents. The fourth critical issue relates to how such indicators, once identified, should be used and especially how critical triggers should activate or repeal  the dynamic measures. Once indicators have been identified,  their use in triggering time varying measures is far from obvious. The fifth issue concerns the coordination of macro polices among countries, since the actual implementation of the common regulatory framework can generate very different sets of rules and provisions.