The financial crisis of 2007-2010 has brought the topic of financial supervision and regulation to the forefront of the policy debate. While microprudential supervision had already undergone a reform process prior to the crisis, with a trend towards unified national supervisory bodies outside the central banks, a major overhaul of microprudential and macroprudential regulation and supervision is on its way around the globe. Especially with regard to macroprudential supervision, this reform process often assigns central banks a prominent role.
What is the rationale for involving central banks in macroprudential policy? The aim of macroprudential supervision has been described as to “limit the risk of episodes of financial distress with significant losses in terms of the real output for the economy as a whole” (Borio 2003, p. 183). One argument in favor of central bank involvement is based on the notion that combining financial supervision with monetary policy tasks can lead to synergies, e.g. through information gains, thereby possibly leading to a more effective conduct of monetary policy and/or to more effective crisis prevention and management (Borio 2009). As argued by Blinder (2010), central banks should monitor and regulate systemic risk not only because a financial stability objective is related to the objectives of monetary policy, but also because it is likely to require a lender of last resort function. Feldstein (2010) suggests that the Federal Reserve should systematically incorporate systemic risk considerations in its monetary policy process, arguing that its low interest rate policy in the early 2000’s did not appropriately consider the potential repercussions on asset prices and the risks of a bursting bubble.
At the same time, the involvement in macroprudential tasks might entail risks for central banks: A supervisory role might at times lead to conflicts among different goals, for instance if the central bank would need to tighten monetary policy, yet faces concerns about the solvency of financial intermediaries (Goodhart and Shoenmaker 1995, De Grauwe and Gros 2009). Furthermore, a macroprudential task could entail a risk for the reputation of a central bank, a point that has been raised in connection to microprudential supervision by Goodhart (2002), but equally applies in the macroprudential arena. Failures in financial supervision do typically attract a lot of media attention, with possibly adverse effects on the confidence that the central bank enjoys with the public. In contrast, successful supervisory roles normally go unnoticed, implying that the reputational risks for the central bank are asymmetric. A confidence loss, in turn, might adversely affect the effectiveness of the central bank’s monetary policy conduct.
Given the emerging involvement of monetary authorities for macroprudential policy, central bank communication about financial stability issues is bound to play a much more central role as a policy instrument, also because in many cases, central banks are explicitly assigned to provide information, analysis and recommendations about systemic risks.
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Macroprudential policy and central bank communication
