Would Macroprudential Regulation Have Prevented the Last Crisis?
AbstractHow well equipped are today's macroprudential regimes to deal with a rerun of the factors that led to the global financial crisis? To address the factors that made the last crisis so severe, a macroprudential regulator would need to implement policies to tackle vulnerabilities from financial system leverage, fragile funding structures, and the build-up in household indebtedness. We specify and calibrate a package of policy interventions to address these vulnerabilities—policies that include implementing the countercyclical capital buffer, requiring that banks extend the maturity of their funding, and restricting mortgage lending at high loan-to-income multiples. We then assess how well placed are two prominent macroprudential regulators, set up since the crisis, to implement such a package. The US Financial Stability Oversight Council has not been designed to implement such measures and would therefore make little difference were we to experience a rerun of the factors that preceded the last crisis. A macroprudential regulator modeled on the UK's Financial Policy Committee stands a better chance because it has many of the necessary powers. But it too would face challenges associated with spotting build-ups in risk with sufficient prescience, acting sufficiently aggressively, and maintaining political backing for its actions.
CitationAikman, David, Jonathan Bridges, Anil Kashyap, and Caspar Siegert. 2019. "Would Macroprudential Regulation Have Prevented the Last Crisis?" Journal of Economic Perspectives, 33 (1): 107-30. DOI: 10.1257/jep.33.1.107
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy
- E58 Central Banks and Their Policies
- F44 International Business Cycles
- G01 Financial Crises
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G28 Financial Institutions and Services: Government Policy and Regulation