The International Monetary Policy (IMF) last night released a paper and speech arguing for the implementation of macro-prudential controls on bank lending in order to curb the risk of asset bubbles, particularly in housing.
According to the speech by IMF fnancial counsellor, José Viñals, macro-prudential tools, such as countercyclical capital buffers and provisions, limits on loan to value and debt-to income ratios, and liquidity tools to contain funding risks from rapid increases in credit, can strengthen financial stability in the face of accomodative monetary policy:
[Macro-prudential] policies can make the financial system more resilient to a range of shocks. This could help prevent future financial crises.
Significant progress has been made, largely through experimentation in several countries, but also through research and policy development by leading academics, practitioners, and international organizations such as the IMF. This morning, the Fund published a paper on the key aspects of macroprudential policy, which represents the culmination of a multi-year policy development effort.
… macroprudential policy is highly relevant for policymakers in both advanced and emerging economies who are seeking to cope with the side-effects of exceptionally accommodative monetary policies in the countries first hit by the crisis…
So, what can macroprudential policy do for monetary policy? More effective macroprudential policy can help a lot. In particular, if it has an appropriate range of tools, macroprudential policy will be better able to address the undesired side-effects of monetary policy on financial stability. It thus allows for greater room for maneuver for the monetary authority to pursue price stability.
Also, to the extent that macroprudential policy reduces systemic risks and creates buffers, this helps monetary policy in the face of adverse financial shocks. It can reduce the risk that monetary policy runs into constraints such as the zero lower bound—recently hit by many advanced economies…
The IMF paper also notes that using macroprudential policies can be challenging for regulators – APRA and the RBA in Australia’s case – because success at avoiding a crisis is not easily measurable, whereas the costs are more immediate and obvious:
Biases in favour of inaction over action are compounded by financial lobbying, political interference and public opposition…
Financial imbalances often grow in the background and under the surface of apparent economic tranquillity…
Importantly, however, Viñals argues (as I have) that macro-prudential policies are no cure-all, and that reform still needs to be made at the policy level – in Australia’s case fixing the supply-side of the housing market and reforming tax laws that contribute to housing speculation (e.g. negative gearing):
…[However,] governments may sometimes be tempted to use macroprudential policy as a substitute for other necessary policies, in order to escape difficult political decisions. They should refrain from doing so. Macroprudential policy is not a panacea.
Overall, the IMF’s stance highlights the global shift towards macro-prudential policies by financial regulators.
As noted previously, the RBA last year published a detailed study of macroprudential policy actions by in 57 economies taken over the past 30 years, which found that certain types of macro-prudential tools had been successful in stabilising house prices and credit cycles. Yet for some reason, both the RBA and APRA remain reluctant to implement macro-prudential curbs, despite the obvious housing risks developing and the shift towards such regulation globally.
The longer Australia’s financial regulator wait the take action, the greater the risks of imbalances developing in the housing market, and the more it will find itself at odds with financial regulators globally.
