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Allocating macroprudential powers

The ESRB report defines the overall policy framework for the financial system, and then analyses interactions between the various policy objectives as well as the institutional settings. The authors discuss the main principles that should guide the allocation of macroprudential power, and how these principles may change depending on different settings.

Advisory Scientific Committee, report No 5
5 November 2014
Source: European Systemic Risk Board

The ESRB ASC report was written by Dirk Schoenmaker, with contributions from Daniel Gros, Sam Langfield and
Marco Pagano.


In the wider policy framework for the economic and financial system, monetary, macro-prudential and micro-prudential policies are intimately linked. The macro-prudential authority should be allocated to the body where the overall balance of synergies (between policy objectives) over conflicts and the required expertise are the largest. This report reviews the pros and cons of the four institutional models for the allocation of macro-prudential powers: (1) the government, (2) the central bank, (3) the financial authority and (4) a committee with representatives from these three bodies.

Macro-prudential policy requires complete independence from short-term political pressures to deal with the inherent conflict between the short term and the long term. An independent agency, such as the central bank or a financial authority, may therefore be appropriate for macro-prudential policy. Adequate arrangements for democratic accountability are then important.

There is a link between macro- and micro-prudential policies, as their instruments overlap to a large extent. But the key issue is the expertise and corporate culture of the body that takes the macro-prudential decisions. Macro-prudential policy (just like monetary policy) requires a macroeconomic approach that focuses on the entire financial system, while micro-prudential supervision is more micro-oriented, as it looks at individual institutions. These perspectives can differ significantly. As the stability of the whole financial system is more important than that of its individual components, macro-prudential concerns should generally prevail over micro-prudential concerns, when they conflict. Nevertheless, the micro-prudential concerns should be addressed as well.

Macro-prudential and monetary policies also have synergies and conflicts. Nevertheless, they share the same methodological approach, which is commonly found at central banks. Allocating macro-prudential powers to a central bank is therefore most likely to maximise synergies between policy objectives under most circumstances. To ensure appropriate trade-offs, a central bank may assign responsibility for the two policies to separate departments.

Committee decision-making tends to be more balanced than that of a single institution. But this benefit may not extend to committees comprising bodies with differing objectives. Reputational concerns may induce members to manipulate information and vote strategically. Furthermore, large committees are prone to inaction bias. Finally, when chaired by a government representative, committees can be sensitive to short-term political pressures.

Special considerations apply to the euro area in the presence of the banking union. Macro-prudential policy is even more important in a monetary union with a “one-size-fits-all” monetary policy. Proactive macro-prudential policies are then needed to address financial imbalances at the country level.

Finally, the ESRB, being responsible for the overall macro-prudential framework in the European Union (EU), has a key role in ensuring a consistent approach across the EU and examining cross-border effects of the use of macro-prudential instruments at the country level.