New Policies To Fend Off Financial Crises

Policies needed for national, global stability

Growing international experience provides valuable lessons

IMF will help countries devise effective crisis-prevention tools

To help countries design and implement these policies, known as macroprudential policy, the International Monetary Fund has developed a new framework to guide countries as they choose approaches best suited to their needs.

“This framework is the culmination of a multi-year policy development effort,” said José Viñals, Financial Counsellor to the IMF’s Managing Director. “It is a milestone for the IMF and its member countries because it will help them develop essential crisis-prevention tools.”

The policies can include measures such as loan-to-value ratios to stop excessive mortgage borrowing, or additional capital to increase banks’ resilience to economic shocks.

Countries can use the policies to help rein-in excessive lending when the economy is heating up, and then relax the policies in response to adverse shocks. Low interest rates in some advanced economies may lead to more risk taking by financial institutions and capital flows into emerging markets, and macroprudential policies can help address the resulting risks.

The IMF said effective macroprudential policy requires the ability to assess risks to the financial system as a whole, assemble and deploy the right tools to reduce such risk, adjust the scope of financial regulations, and close data and information gaps.

The new policy also requires strong institutions to manage the policies, including a dedicated macroprudential authority – a single institution or a policy committee – with a clearly defined mandate. Although countries’ arrangements may vary, the IMF analysis suggests that central banks should play a key role in conducting macroprudential policy.

Detect and contain risks before they turn into a crisis

The crisis has exposed the costs of financial instability at the national and global levels. Detecting and containing the build-up of such risks requires dedicated macroprudential policies in both advanced and emerging economies.

While establishing a well-functioning macroprudential policy remains a work in progress, there is growing international experience in this area. The new analysis from the IMF brings together—and distills— valuable lessons for policymakers.

Don’t leave home without a roadmap

Countries should clearly define the goals and scope of macroprudential policy at the national level...