“Macro…, what?!” The New Buzz on Financial Stability

José Viñals (l) and Nicolás Eyzaguirre

By José Viñals and Nicolás Eyzaguirre

(Version in Español)

Just a few years ago, “Macro…, what?!” would have been a typical reaction to hearing the technical term that today is the talk of the town among financial regulators.

But in the aftermath of the global financial crisis, macroprudential policy—which seeks to contain systemic risks in the financial system—has indeed come to be an important part of the overall policy toolkit to preserve economic stability and sustain growth.

For example, a number of countries, especially emerging markets, have been relying on macroprudential policies (such as loan-to-value or debt-to-income ratios, or countercyclical loan loss provisions) to rein in rapid credit growth, which—if unchecked—could destabilize the financial system and, ultimately, bring about a recession and drive up unemployment.

The IMF has assumed a leadership role in macroprudential policy analysis. Our recent analysis examines policy options for designing effective institutional frameworks and instruments.

Macroprudential policy design is still very much a work in progress, and many countries are learning by doing. That is one reason why in our work we underscore that there is no “one size fits all” institutional design for macroprudential policy and that macroprudential instruments should be specific enough and based on clear rules that still allow for adjustments during the business cycle. We also assess regional approaches to implementing macroprudential policy, for example in Latin America.

Designing effective macroprudential policies

Recently, we co-hosted with the Central Bank of Uruguay a high-level regional conference on how macroprudential policies can help achieve financial stability. The conference gathered central bank presidents, financial supervisors, and other senior policymakers from Latin America and some advanced economies to exchange views on topics such as the proper institutional design for macroprudential policies and effective instruments. The presentations by the participants are available here.

Conference participants spoke about challenges with designing and implementing macroprudential policy frameworks. Participants agreed that financial stability is a responsibility shared by all policies. Strong macroeconomic policy frameworks, especially with flexible exchange regimes, were seen as essential to prevent the accumulation of financial imbalances that could lead to systemic risk.

Many participants noted that effective microprudential policies, including effective supervision, are also critical to prevent excessive risk taking by individual financial institutions, which could lead to broader systemic risks. However, while acknowledging the critical role of macroprudential tools, they recognized that the full effects of such tools are still not well understood.

Participants also emphasized that strong policy coordination is essential so that policies reinforce each other and do not work against each other.

To ensure appropriate coordination and information sharing, many countries have established financial stability committees. Participants agreed that these committees must be tailored to the individual circumstances of each country, although there was broad support to give a key role to the central bank.

Sharing experiences

Going forward, the IMF will continue to help member countries to design macroprudential policy frameworks. Conference participants noted that the Fund was in a unique position to draw on the experiences of all its members and to assume a leadership role in research and analysis on macroprudential policies. Also, the Fund’s surveillance and technical assistance activities were viewed as highly beneficial and close coordination between these areas seen as critical.

When carefully implemented, macroprudential policy can become a cornerstone of financial stability policy. The dictionary of financial lingo has been given an important new entry.

2017-04-15T14:10:48-05:00March 23, 2012|


  1. Per Kurowski March 23, 2012 at 10:47 am

    The most important macroprudential policy, yet to be recognized, is the macroimprudence of benefitting through regulations those who are already benefitted by the markets, as in the case of capital requirements based on perceived risks, since that will lead to an overdose of benefits, which will create dangerous systemic obesities and equally dangerous systemic anorexics.

  2. Javed Mir March 25, 2012 at 5:42 pm

    Economic theory never postulates that there will always be profits and no losses. Whenever revenues exceed expenditures there will be obesity and whenever expenditures exceed revenues there is going to be anorexia.

    Macro- and micro-prudential regulations, however, give us early warnings to preempt the extraordinary and unexpected events.

  3. Amir Dewani March 27, 2012 at 2:12 am

    Macro prudential what, when, where, why, how? Sorry to say after reading the whole article, I couldn’t make head or tail of the subject!

    Maybe my sense of grasping the economic jargon is not so sharp. Yet, there are some points I wish to make with due respect to the research scholars at the IMF ivory towers. Whatever mechanism is evolved for ensuring financial stability, the importance of the role of those who manage, regulate, and supervise the concerned institutions in different countries is crucial. The global ground realities can’t be ignored. For example, political stability in a particular region or country is a must for any initiative like the macro prudential jargon being discussed under the aegis of the IMF.

    For a prudential approach, a model of the mechanism must be developed, after giving necessary trial runs, and then presented in the conference to seek opinions, input or advice from the participants. This doesn’t appear to have been done by the IMF, as I read here. The other factors relate to attitudinal development, building fire walls against massive corruption spread all around and involving participation of the local governments and their powerful bureaucrats for the sake of ensuring financial discipline. Remember, there are countries in the world where governors of central banks and finance ministers are changed/removed every now and then causing lot of turmoil in the system of management as a whole. Even the warnings and signals of the central banks are ignored.

    Hence any ‘Macro…, what’ initiatives are likely to be frequently threatened. I, therefore, thought in fitness of things, to point this out with due respect. Thanks.

  4. iMFdirect March 27, 2012 at 6:32 am

    Many thanks for your comment. Agree this is a difficult subject both to explain and to understand.
    For more of a primer on macroprudential policy, please see an article in Finance & Development magazine which gives a longer, and possibly simpler explanation.


  5. Per Kurowski March 27, 2012 at 6:43 am

    I am referring to obese bank exposures and to what is or was officially considered as absolutely not-risky, like triple-A rated securities or a Greece, and anorexic bank exposures to what is considered as risky, like small businesses and entrepreneurs,

    And that happened because the regulators, in the name of micro-prudence, allowed banks to hold much less capital/equity when engaging with what was considered not risky, and which anyone who knows a little about economic theory, suggests the possibility of higher returns on equity, in other word a great incentive.

    May I take the opportunity to ask any golfer in the IMF. How long would the game of golf survive if handicap officers take away strokes from lousy players like me and give them to great players such as them? Because that is how the capital requirements for banks based on perceived risks work.

  6. Maher Aldogail April 9, 2012 at 4:31 pm

    An extremely relevant link. Really helps an accurate understanding of the general macroprudential policy trends. Highly appreciated. Hope you can add material on how to follow up and the mechanics of implementation.

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