February 22, 2018
When the capacity to communicate effectively on financial stability policies is not there, it is like trying to fly a plane with one wing missing. It takes more than sound policy making. Communications is an essential part of the job.
Following the global financial crisis, many countries redoubled their efforts to build stronger financial stability frameworks. Central banks and supervisory agencies have enhanced their capacity to identify and monitor systemic risks in the financial system and have developed new policies to mitigate them.
They have also increasingly recognized the importance of communicating effectively on financial stability policies. More and more, the official agencies are publishing their financial stability work, including the results of stress tests, asset quality reviews, and financial stability reports. As Andy Haldane, Chief Economist of the Bank of England has put it: “The most recent chapter in central banks’ evolutionary history has been increased openness and transparency about their actions, monetary, macro- and micro-prudential.”
Even though there is a growing recognition of the importance of communications to financial stability, there is often still a need to develop the capacity to explain these complex technical issues to a broader audience. This is especially true of the new systemic risk measures introduced after the global financial crisis.
Neglecting communications can reduce the traction of policies and even lead to adverse reactions if the public misinterprets the authorities’ actions. That’s why central banks need to build in communications capacity from the outset. Doing so can help policy makers to obtain stronger buy-in, not just by market participants and experts, but also by the press and a broader audience—and thus will help to underpin more successful policy implementation.
Communicating financial stability is challenging
Communicating financial sector policies is not a trivial matter. Even in advanced economies with deep and liquid financial markets, where central banks have had many years to hone their ability to interact with professional economic media and where the public is financially literate, this type of communications is complex and demanding.
The challenges in low-income countries and emerging markets are even greater. The central banks in these countries may have less hands-on experience handling financial crises, the media covering economic news has less depth and capacity, public financial literacy is generally lower, and social media and messaging systems can add further fuel to rumors and speculation. In addition, many of these countries are not just looking to maintain financial stability, but also to increase financial inclusion—that’s to say, expanding access to credit to segments of the population that may be less financially literate. This aspect of the work of central banks can add to financial stability risks.
But success is possible
To overcome these challenges is difficult—but it is possible with sufficient attention and resources. For example, in 2016, with the public already concerned about the health of banks following some bank failures in 2014, the National Bank of Moldova took actions to strengthen governance in some banks, explained its actions to a broader audience, and managed public reaction well. Having put financial sector on stronger footing, Moldova agreed on a financial program with the IMF shortly thereafter.
When housing prices started to rise sharply in Hong Kong SAR in 2010, and macroprudential measures to tighten mortgage lending were perceived by some to be failing to contain housing prices, the Hong Kong Monetary Authority formed an inter-departmental communications team to collect public opinions and formulate, implement, and modify the communications strategy covering both macroprudential and monetary policies. The HKMA launched an effective multi-faceted media campaign to explain that its measures for mortgage lending were aimed at strengthening the resilience of the banking system but not controlling property prices.
So, what needs to be done?
- Make communications an integral part of financial stability work. Communications should not be an afterthought when building financial stability frameworks. It’s not all about data, analysis, and measures, but also about getting your messages across and gaining support from a broader audience.
- Build a comprehensive plan to develop communications capacity. In many countries it may take a long time to bring about the needed improvements—three to five years—because there may be no people in the domestic labor market with the needed skills. Official agencies will often need to train communications staff in-house, and help them gain experience.
- Engage in cross learning from other institutions. Countries can make more rapid progress by engaging with other institutions that can bring international experience and a more structured approach. The Fund has recently developed a framework for building up financial stability communications—including use of the full range of established communications tools, such as interviews, press conferences, background briefings as well as communications via digital platforms and has been working with some central banks on strengthening their communications.
IMF Managing Director Christine Lagarde called on policymakers to “repair the roof while the sun is shining.” Financial stability risks are building globally, with rising debt and high asset valuations, as highlighted in the IMF’s recent Global Financial Stability Report. Central banks and financial supervisors should build their communications capacity now to make sure they will have two wings to fly in any weather conditions.