Macroprudential policy during COVID
In this paper Bergant and Forbes argue that countries’ ability to use macroprudential policy during COVID was significantly constrained by the extent of existing “policy space”, i.e., by how aggressively policy was tightened before COVID. In particular they find that:
- Countries which tightened macroprudential policy more aggressively before COVID tended to have lower levels of financial stress as measured by the increase in CDS spreads or bond yields, as well as lower levels of economic stress;
- Countries which experienced heightened levels of market and financial stress also eased macroprudential policy more aggressively in the initial stages of the pandemic.
Yet an important question remains unanswered concerning the use of macroprudential tools:
If countries were limited in their ability to build policy space in the use of certain tools (such as adjusting policy interest rates), could they partially compensate for this by putting more emphasis on creating macroprudential policy space and then adjusting macroprudential policy instead of other policies that are more constrained?
Macroprudential Policy during COVID-19: The Role of Policy Space
Authors: Katharina Bergant, Kristin Forbes
From: International Monetary Fund, MIT
Structural vs cyclical buffers
Before the onset of COVID in the euro area banking sector as a whole, countercyclical capital buffer requirements accounted for only 0.2% of risk-weighted assets. On the other hand, structural buffer requirements, comprising the capital conservation buffer, systemic risk buffers and buffers for systemically important institutions, were at at 3.4%. The latter are also not releasable. De Guindos argues, that the macro-financial stabilization function of macroprudential policy was limited due to the fact that such a tiny fraction of capital buffers were releasable. In addition, recent research by ECB staff suggests that if more countercyclical buffers could have been released during the COVID crisis, they would have led to much improved bank lending and smaller fall in euro area GDP in 2020.
In reassessing the balance between structural and cyclical buffers and to create more macroprudential space, de Guindos proposes three guiding principles:
- The creation of macroprudential space should be capital-neutral;
- The additional macroprudential space created needs to have strong governance in order to ensure that capital buffers are released in a consistent and predictable way;
- Considerations to create macroprudential space should focus on options that ensure continued compliance with applicable international standards set by the Basel Committee.
Macroprudential policy after the COVID-19 pandemic
By: Luis de Guindos – ECB
