62592 POVERTY THE WORLD BANK REDUCTION AND ECONOMIC MANAGEMENT NETWORK (PREM) Economic Premise JUNE 2011 • Number 60 JUN 010 • Numbe 18 How Complementary Are Prudential Regulation and Monetary Policy? Otaviano Canuto Could either monetary policy or financial prudential regulation be relied on individually to mitigate asset price cycles or their effects? If both ways are effective, monetary policy and prudential regulation could then be considered “substitutes,” in the sense that the individual use of either instrument leads to a reduction in the volatility of both corresponding targets. This note, however, argues in favor of complementarity—rather than substitution—in the use of monetary and macroprudential policies: the combined (articulate) use of both policies tends to be more effective than a standalone implementation of either. , Monetary Policy Asset Prices, and Moderation” in developed economies, with relatively low infla- Financial Stability tion rates and small output fluctuations from the mid-1980s onward, seemed to vindicate this path. Asset price cycles had been a concern for many years prior to As is now known, this world of presumed stable monetary the recent global financial crisis, but were seen as a separate is- and financial conditions was severely shaken by the recent glob- sue that was not a monetary policy concern. Even when the al financial crisis. With the benefit of hindsight, it is easy to frequent appearance of asset price bubbles started to be ac- draw lessons. Asset price booms and busts were acknowledged knowledged, the belief was—“the Greenspan-Bernanke ap- to be both pervasive and harmful: real estate and stock market proach”1—that attempts to detect and prick them at an early booms contributed to excess U.S. household debt and to fragile stage would be impossible and potentially harmful. If neces- asset liability structures, the interconnectedness of financial sary, mopping up after the bubble burst would be safer, using firms’ balance sheets, and the danger of too-big-to-fail institu- interest rate cuts to help economic recovery.2 tions. The rapid global transmission of an asset price bust Low, stable inflation was seen as a necessary and sufficient pushed the world economy to the edge of quasi-collapse (Ca- condition for stable growth with moderate unemployment. nuto 2009). This condition could be pursued through an inflation targeting But was it lax monetary policy that led to the creation of framework, using interest rates and clear communication rules these bubbles and then to financial instability? Some, such as to achieve a predefined inflation objective, as the single focus Svensson (2010), say no. For them, the financial crisis was for monetary authorities. Stable inflation would also result in caused by factors other than monetary policy; monetary policy low-risk premia, which combined with competition in finan- and financial stability policy are distinct–it was the latter that cial markets would help achieve financial stability. The “Great failed.3 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise But if financial stability is indeed a legitimate objective of a tary policy. However, the intensity and magnitude of present central bank, then should a “financial variable” (for example, an inflows make it difficult to sterilize them fully, and resources asset price indicator) be integrated into the monetary policy that remain available to market participants end up contribut- framework? More specifically, should policy makers incorpo- ing to a significant expansion in credit. Low-cost external fund- rate indicators of financial stability into the central bank’s reac- ing creates incentives to increase risk taking and can result in tion function in a kind of augmented Taylor Rule? Should they asset price distortions, including of the exchange rate. Hence, react automatically to variations in asset prices—or some associ- excessive capital inflows contribute to a brisk pace of domestic ated variable, such as credit expansion—as they do under infla- credit growth that fuels inflationary pressures and aggravates tion-targeting regimes in the case of variations in output gaps financial instability.4 and inflation? The identification of a powerful transmission mechanism The best practitioners are divided. Blinder (2010) argues between global liquidity and EMEs’ credit markets does not ne- that “a distinction should be drawn between credit-fueled bub- cessitate a monetary policy reaction to reduce credit growth. bles (such as the house price bubble) and equity-type bubbles The correlation between asset prices and core macroeconomic in which credit plays only a minor role (such as the tech stock variables (output gaps, inflation) remains less than perfect, bubble).” In this view, the “mop-up-afterwards” approach is even assuming that financial fragility may be successfully miti- still appropriate for equity bubbles not fueled by borrowing, gated by discretionary interest rate policy. After all, the whole but the central bank should try to limit credit-based bubbles— point that monetary policy makers cannot be solely guided by probably more with regulatory instruments than interest rates. conventional inflation-targeting rules in the presence of sub- This attitude may eventually become the new consensus on stantial fluctuations in asset prices derives from the experience how to deal with asset price bubbles; indeed, Bernanke (2010) that relevant macroeconomic dynamics associated with asset comes close to endorsing it. price fluctuations may not be captured by merely observing Others do not recommend treating asset prices on the same output and goods price fluctuations. Therefore, it seems likely footing as the common components of Taylor Rules—irrespec- that interest rate movements sparked by asset prices or their tive of whether asset prices are credit fueled or not. After all, surrogates may well lead to less stability in output gaps and according to IMF (2009, 116): goods prices. Even the best leading indicators of asset What about the alternative of trying to reduce financial in- price busts are imperfect—in the process of stability without using monetary policy, but through pruden- trying to reduce the probability of a danger- tial and regulatory rules (for example, those of bank capital or ous bust, central banks may raise costly false liquidity rules), thus avoiding the build-up of fragility in bal- alarms. Also, rigid reactions to indicators ance sheets? Would that be sufficient to guarantee both finan- and inflexible use of policy tools will likely cial and macroeconomic (that is, price) stability? Before re- lead to policy mistakes. Discretion is required sponding to these questions, let’s identify some distinctions [emphasis added]. between micro- and macroprudential regulation. That cautious approach does not mean complacency. On Macro- and Microprudential Regulation the contrary, signs of rising macro-financial risks may demand a response from policy makers. But first it is necessary to properly A key distinction when considering threats to financial stabili- identify the reasons behind the evolution of rising asset prices ty is between microrisks, which arise due to specific problems in and credit—a task that is far from simple: for example, the pres- individual financial institutions and macrorisks, which affect ent global context of excess liquidity makes most emerging the financial system as a whole because of the interconnected- economies the recipients of massive inflows of foreign capital. ness of the institutions within the system. These flows have a structural component: they are related to Prior to the recent global financial crisis, financial stability the improvement of emerging market economies’ (EMEs) fun- was taken for granted provided that individual financial institu- damentals and, if used for productive purposes, can contribute tions adopted sound prudential rules and maintained adequate to increasing investment and productivity. However, these levels of capital commensurate with the types and levels of risks flows also have a more temporary component: portfolio flows they faced.5 and short-term deposits. In a context of high liquidity in inter- The crisis has shattered this view. Microprudential tools— national markets and an uncertain outlook for mature econo- concerned with ensuring the soundness of individual institu- mies, the temporary component is seen by many as excessive. tions and the protection of depositors—have not sufficed for fi- Some of the excessive inflows to many EMEs have been ab- nancial stability and the avoidance of financial crises. Sound sorbed by central banks’ accumulation of reserves. The reserve risk management of individual financial institutions is not accumulation policy is usually implemented in conjunction enough to guarantee sound management of systemwide risk with a sterilization policy to maintain an independent mone- (De la Torre and Ize 2009). 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Why? Despite well-designed microprudential rules, there each institution’s contribution to systemic risk and that smooth might be spillovers and externalities across institutions that af- the financial cycle, that is, reduce the systemic risk that inher- fect the financial system as a whole, for example, bank panics, ently builds up in booms and has damaging consequences in fire sales of assets, and credit crunches. Either because of links slumps, since leverage, risk-taking, and credit and asset prices between the balance sheets of financial institutions and/or be- are pro-cyclical and crises typically follow booms. cause of contagion in terms of confidence, risks taken by single Macroprudential Policy as Countercyclical financial institutions may end up affecting the entire financial Regulation Rules system. These spillovers and externalities might come, for example, The objective of macroprudential regulation is not to eliminate from the system’s characteristics: a financial system composed the financial cycle, but to reduce its magnitude and associated of large, interconnected firms is likely to produce moral hazard systemic risk. Pro-cyclicality is linked to all business cycles and in the face of the (now) standard too-big-to-fail dilemma for goes pari passu with most fundamentals and behavior (for ex- policy makers. Even if all firms are soundly regulated, the pos- ample, investment and “animal spirits”). What macropruden- sibility of one failure in this interconnected system creates con- tial rules can do is reduce pro-cyclicality and control the exter- tagion and negative externalities to the whole system. But this nalities that amplify fluctuations. By doing this, can also happen in a very different context, say in a system com- macroprudential regulation can ensure that the financial sys- posed of small, independent, perfectly regulated and uncon- tem operates with lower potential systemic risk and can en- nected financial firms. If all firms use an identical risk-assess- hance the resilience of the system in downturns. ment model that might be flawed by not considering a specific Naturally, one of the first suitable macroprudential ideas tail event, the whole system could collapse, regardless of its ap- that emerged after the 2008 crisis was to enhance capital and parent robustness and lack of connectedness. liquidity regulations, since both problems were at the origin of Other examples of why microprudential tools are insuffi- the quasi-meltdown of the global financial industry after the cient can be found in the mortgage industry. Despite a number Lehman Brothers’ collapse. The idea was that a more robust of consumer protection rules to limit overborrowing and in- banking system (in terms of capital and liquidity) would be less dustry guidelines to help scrutinize a borrower’s willingness subject to crises, or at least would not require the scale of tax- and ability to pay, the extension of mass lending for real estate payer transfers to banks that occurred in 2008. Tighter regula- has been an almost universal feature of credit booms in all tory standards might also contribute to smaller output fluctua- countries.6 tions and to higher welfare gains even apart from banking Asset price cycles—and the corresponding likelihood of full- crises. There are a number of studies (see for example BCBS blown financial crises—may well establish a feedback loop with [2010]) that point out that better capitalization and increased pro-cyclical risk assessments present in traditional micropru- bank liquidity reduce the likelihood and the severity of crises, dential rules. Suppose, for example, that there is an increase in and that regulatory reforms can reduce the amplitude of busi- house prices due to a demand shock. The rise in the value of ness cycles, especially using countercyclical capital buffers. real estate as collateral tends to raise the repayment probability Thus the Bank for International Settlements (BIS) and the for housing loans, which reduces the lending rate charged by Basel Committee on Banking Supervision (BCBS) have been credit suppliers. Additionally, if financial institutions follow advocating the adoption of countercyclical capital standards. their own risk assessments when estimating appropriate ratios The idea is to have banks build up capital buffers in upturns between capital and risk-weighted assets to be held, capital and to draw them down in downturns. Buffers need not be part costs associated with such credits decline. Reduced borrowing of the prudential minimum capital requirement and would be costs stimulate borrowing for investment purposes in the econ- capital in excess of that minimum, so that it is available to ab- omy at large, most likely leading to further bouts of house price sorb losses in bad times. Countercyclical capital buffers would hikes. If house price bubbles develop, there will be a whole net- limit (a) the risk of large-scale accidents in the banking system work of larger interlinked balance sheets, dependent on over- and (b) the amplification of macroeconomic fluctuations dur- valued collateral, although individually balance sheets (includ- ing crises.7 The macroprudential rationale for the idea is the ing those of individual homeowners) may look sound. time-inconsistency argument that risks tend to build up in Therefore, there is a need for macroprudential regulation good times, but their negative consequences materialize only concerned with ensuring the stability of the financial system as with a lag. This feature reveals the limitations of current risk- a whole and the mitigation of risks to the real economy. Macro- measurement practices as well as distortions in the micropru- prudential regulation should aim to make the overall incentive dential incentives of individual firms. structure for financial firms coherent and consistent so that the On the one hand, there is a perception that risk-sensitive above mentioned externalities are internalized by the system. minimum capital requirements embedded in Basel II could The idea is to design a set of principles and rules that can reduce lead to excessive pro-cyclicality.8 On the other hand, several ob- 3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise servers have argued that by raising capital require- Table 1. Calibration of the Capital Framework: Capital Requirements and Buffers ments in a countercyclical way, regulators could help (all numbers in percent) choke off asset price bubbles—such as the one that Common equity Tier 1 capital Total capital developed in the U.S. housing market—before a crisis (after deductions) develops. The Turner Review (see Financial Services Minimum 4.5 6.0 8.0 Authority [2009]), for instance, favors countercycli- Conservation buffer 2.5 cal capital requirements, as does Brunnermeier et al. Minimum plus conservation (2009), who propose to adjust capital adequacy re- 7.0 8.5 10.5 buffer quirements over the cycle by two multiples—the first Countercyclical buffer rangea 0–2.5 related to above average growth of credit expansion Source: BCBS (2010). and leverage, and the second related to the mismatch in the maturity of assets and liabilities. At the international level, there has been signifi- ments aiming at macroeconomic and financial stability. A pru- cant progress toward establishing new standards in this area; dent approach should try to avoid “corner solutions,” that is, BCBS has developed a countercyclical framework that involves putting the entire weight of ensuring price and financial stabil- adjusting bank capital in response to excess growth in credit to ity on only one instrument.10 the private sector, which it views as a good indicator of systemic As an illustration of questionable policy directions, there are risk. In a proposal released in September 2010, BCBS suggested two extremes that need to be avoided. Monetary policy should the implementation of a countercyclical capital buffer ranging not be used as a standalone method to prevent bubbles (even if from 0 to 2.5 percent of risk-weighted assets (table 1). Overall, occasionally being part of the policy reaction to asset prices), total capital requirements would rise from a minimum of 8 but it does need to be used to treat the general equilibrium ef- percent of risk-weighted assets today under Basel II up to 13 fects of such bubbles. Similarly, using prudential regulations percent when the maximum value for the countercyclical capi- exclusively to contain inflationary pressure arising from general tal buffer is taken into account.9 equilibrium effects of aggregate demand growth above poten- It needs to be acknowledged that macroprudential rules tial would be inappropriate (in addition to running the risk of have been in place previously and are numerous. For example, undermining the credibility of any inflation-targeting regime), at the end of 2009, the Committee on the Global Financial Sys- but it should be a useful complement to contain the risks aris- tem (CGFS) surveyed central banks on the use of macropru- ing from excessive overall credit growth. dential tools. The survey covered the definition of macropru- A pragmatic approach that combines the use of tools and dential instruments, their categorization, and objectives for skills from both monetary policy and prudential regulation has their use. These rules range from measures aimed at controlling begun to emerge with some common policy practices: credit growth (for example, caps on loan-to-value [LTVs] linked either to borrowers’ characteristics or to overall market condi- 1. Monitor closely the local market characteristics of finan- tions), measures to limit interconnectedness of banks, or re- cial stability and the various indicators that can be associ- ducing pro-cyclical bank lending. The responses of 33 central ated with it: rapid credit growth beyond past historical banks are summarized in table 2. In particular, the systemic trend (after controlling for financial deepening and for risk that can arise from a highly interconnected financial sys- how small the initial base is); stock market develop- tem with large, systemically important financial institutions ments; rapid asset price growth (beyond what funda- (SIFIs) has been recognized as an issue that macroprudential mentals would suggest, including changes in the price of regulation ought to address through additional capital require- specific assets such as the exchange rate or real house ments and/or specific levies related to the size of balance sheets. valuation). In sum, macroprudential rules—potentially including coun- 2. Identify precisely the dynamics and determinants of these tercyclical capital rules—are needed because of the perceived indicators: permanent structural changes in credit mar- risks to financial stability that these externalities produce. On kets (for example, better institutions, accumulated credi- the other hand, there is nothing in prudential regulation to en- bility of macroeconomic policies, improvements in legal courage anyone to expect it to be a self-sufficient tool to address procedures for disputes, and so forth) and/or cycle-related simultaneously both financial and macroeconomic instability causes (for example, expansionary macro stance, growth issues. in income and employment, and so forth). 3. Look for ad hoc special shocks that might be contributing How Should Monetary and Regulatory further to the observed credit and asset price booms (for Policies Be Combined? example, currently, for many emerging markets, the pres- One important message emerging from this discussion is that ence of high levels of global liquidity, growth, and interest monetary policy and regulation are complementary instru- rate differential make pull and push factors favor large 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Table 2. Macroprudential Instruments Cited by CGFS Survey Respondents Economies that have used the instrument Type of instrument Examples Advanced EME Measures targeting credit growth Limits calibrated to borrower risk LTV caps, DTI limits, foreign currency lending limits 2 9 characteristics Absolute limits Aggregate or sectoral credit growth ceilings, limits 4 on exposures by instrument Measures targeting size and composition of bank balance sheets Measures to limit interconnectedness Limits on leverage Size-dependent leverage limits or asset risk 2 2 weights, capital surcharges for systemically important institutions Financial system concentration Limits on interbank exposures 1 2 limits Measures to limit pro-cyclicality Capital Time varying capital requirements, restrictions on 1 1 profit distribution Provisioning Countercyclical/dynamic provisioning 1 5 Measures to address specific financial risks Liquidity risk Loan-to-deposit limits, core funding ratios, reserve 1 8 requirements Currency risk Limits on open currency positions or on derivatives 8 transactions Source: CFGS (2010). capital inflows into emerging markets) with potential con- One of the objectives of central banks is to provide to their sequences for banks’ balance sheets (for example, currency economies, mature and emerging, with an environment of mismatches). price and financial stability, making sure that short-term infla- 4. Look at other forms of balance sheet mismatches arising tionary pressures do not carry over to longer-term planning from the boom, that is, its financing side, making a distinc- horizons for households and firms. To fulfill their mission, tion between credit-fueled bubbles (such as a house price central banks use a broad array of monetary and regulatory in- bubble) and equity-type bubbles, in which credit plays struments. These instruments should be used with timeliness, only a minor role (such as the Internet-technology-stock perseverance, and good judgment. The recent crisis has shown bubble in the United States).11 that ensuring financial stability in a globalized financial world 5. Assess the maturity structure of credit extension and its adds more challenges for policy makers, especially for those in usage, discerning whether it is of a more long-term nature emerging markets. These challenges are accompanied by new (and thus supposedly favoring investment) or of a more practices and new analytical reflections about policy, building short-term nature (and thus most likely directed toward on the achievements of past years in terms of institutions and consumption). commitment to macroeconomic stability. The global economy After going in detail through these analytical elements, a and society will benefit from progress in these areas, even if central bank would be in a better position to pragmatically de- there are difficult times ahead in a world of more uncertainty termine—without discarding its main policy tool (that is, its and complexity. base rate adjustment)—how to combine macroprudential regu- About the Author lation with standard monetary policy. When this is established in the present context, the credibil- Otaviano Canuto is Vice President, PREM Network, at the World ity of a pure inflation-targeting framework is not affected when Bank. This note was written for the G-20 seminar, “Monetary the central bank has also a financial stability goal and when Policy and Macro-Prudential Regulations with High Level of there is a clear separation of goals and instruments, and com- Liquidity: New Policy Challenges for Macro and Financial Sta- munication of price and financial stability objectives. bility in Emerging Markets,” being held June 30–July 1, 2011, 5 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise in Rio de Janeiro, Brazil, organized by the Central Bank of Bra- acting as an automatic stabilizer. In particular, this would ease zil, with the support of the French Presidency of the G-20. the pressure on prudential authorities to refrain from taking restrictive measures in good times. Sixth, it should be inexpen- Endnotes sive to implement. Finally, the scheme should be simple and 1. See, for example, Bernanke (2002). More recently, Chair- transparent (see BIS [2010]). man Bernanke seems to have evolved slightly from this posi- 8. A series of quantitative exercises conducted by the BCBS as- tion; see the closing section of Bernanke (2010). sessed the impact of the cyclicality of capital requirement re- 2. “The past 10 years have been the decade of inflation target- gimes taking risk sensitivity into account. One of the method- ing. (…) Narrowly defined, inflation targeting commits central ologies used adjusted for the compression of probability of banks to annual inflation goals, invariably measured by the con- default (PD) estimates in the internal ratings–based approach sumer price index (CPI), and to being judged on their ability to during benign credit conditions by using PD estimates for a hit those targets. Flexible inflation targeting allows central bank’s portfolios in downturns. Using higher PD (for risk) dur- banks to aim at both output and inflation, as enshrined in the ing upturns would provide—by subtraction with actual data— famous Taylor Rule. The orthodoxy says that central banks an estimate of cyclical effects. should essentially pay no attention to asset prices, the exchange 9. See, for example, the estimates made by Ghosh, Sugawara, rate, or export prices, except to the extent that they are harbin- and Zalduendo (2011) on the near-term implications of Basel gers of inflation” (Frankel 2009). III capital regulations on bank flows to emerging markets, based 3. Financial stability policy failed due to distorted incentives on an analysis of the key determinants of these flows. for excessive leverage, lack of due diligence, lax regulation and 10. Agénor, Alper, and Pereira da Silva (2011) develop a general supervision, rapid growth of securitization, myopic and asym- equilibrium framework for analyzing this issue. Their numeri- metric remuneration contracts, idiosyncratic features of the cal results can be summarized as follows. First, if monetary U.S. housing policy (the GSEs [government sponsored enter- policy can react strongly to inflation deviations from its target prises]), information problems, hidden risk in complex securi- value (that is, there is no value for the policy rate and pace of ties, and underestimation of correlated systemic risks. These rate change that cannot be pursued), the best policy is to follow causes had little to do with monetary policy (Svensson 2010). an aggressive augmented interest rate rule—regardless of the de- 4. Garcia (2011) shows how sterilized interventions by the cen- gree of persistence in the policy rate. By contrast, if monetary tral bank in an inflation-targeting regime tend to have an expan- policy cannot react strongly enough to inflation deviations sionary effect on aggregate demand, such as when capital in- from targets (because the central bank fears destabilizing mar- flows correspond to a strong demand for domestic private assets. kets by raising interest rates sharply while inflation remains 5. The combination of those two views implies regarding finan- subdued, for instance), combining a credit-augmented interest cial regulation and monetary policy as entirely separable. It led rate rule and a countercyclical capital regulatory rule is optimal even to the unbundling of financial regulatory and monetary for promoting economic stability. Second, the greater the de- policy functions among different institutions in some coun- gree of interest rate smoothing, the stronger should be the tries (England and Australia). Conversely, financial stability is countercyclical regulatory response—regardless of how strongly now increasingly considered to be a policy objective for mone- monetary policy can react to inflation. Third, the stronger the tary authorities (Blinder 2010). policy maker’s concern with macroeconomic stability (com- 6. It is also true that this particular segment of the credit mar- pared to financial stability), the stronger should be the sensitiv- ket is heavily affected by the country’s political economy that ity of countercyclical regulation to real credit growth gaps. usually pushes in the direction of rapid credit expansion and 11. As discussed earlier, the main argument against the Greens- erosion of criteria for responsible lending. So it could be unfair pan-Bernanke mop-up-after (laissez-faire)  approach concerns to say that microprudential rules do not apply to mortgages in financial stability. If the central bank allows bubbles to inflate the absence of a control for local politics. and then to burst, it is de facto neglecting financial stability, 7. Any effective scheme would need to have a number of fea- which, in turn, affects its ability to pursue its standard econom- tures. First, it should be able to identify correct timing for the ic stability goals, namely low inflation (and in the case of the accumulation and release of the capital buffer, that is, correctly U.S. Federal Reserve, high employment). identifying good and bad times. Second, the scheme should en- References sure that the size of the buffer built up in good times is suffi- ciently large to absorb losses without triggering serious strains. Agénor, Pierre-Richard, Koray Alper, and Luiz Pereira da Silva. 2009. “Capital Requirements and Business Cycles with Credit Market Imperfections.” Third, the scheme should be able to withstand regulatory arbi- World Bank Policy Research Working Paper No. 5151, Washington, DC. trage, including manipulation. Fourth, it should be interna- ———. 2011. “Capital Regulation, Monetary Policy and Financial Stability.” tionally enforceable. Fifth, it should be as rule-based as possible, Working Paper No. 237, Central Bank of Brazil, Brasilia. 6 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Agénor, Pierre-Richard, and Luiz Pereira da Silva. 2009. “Cyclical Effects of Financial Services Authority. 2009. The Turner Review: A Regulatory Response to Bank Capital Requirements with Imperfect Credit Markets.” World Bank the Global Banking Crisis. London. Policy Research Working Paper No. 5067, Washington, DC. Also forth- Frankel, J. A. 2009. “What’s In and Out in Global Money.” Finance and Devel- coming in Journal of Financial Stability. opment 46 (3) September, http://www.imf.org/external/pubs/ft/ ———. 2011. “Reforming International Standards for Bank Capital Require- fandd/2009/09/frankel.htm. ments: A Perspective from the Developing World.” In International Bank- FSB (Financial Stability Board), IMF (International Monetary Fund), and BIS ing in the New Era: Post-Crisis Challenges and Opportunities, IFR Vol. No 11, (Bank for International Settlements). 2011. “Macroprudential Policy ed. by S. Kim and M. D. McKenzie. Emerald: Bingley. Tools and Frameworks: Update to G-20 Finance Ministers and Central BCBS (Basel Committee on Banking Supervision). 2010. “An Assessment of Bank Governors.” February 14, http://www.imf.org/external/np/g20/ the Long-Term Impact of Stronger Capital and Liquidity Requirements.” pdf/021411.pdf . August, www.bis.org/publ/bcbs173.pdf. Galati, G., and R. 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Ghosh, Karl Habermeier, Marcos Chamon, Mah- CGFS (Committee on the Global Financial System). 2010. “Macroprudential vash S. Qureshi, and Dennis B. S. Reinhardt. 2010. “Capital Inflows: The Instruments and Frameworks: A Stocktaking of Issues and Experiences.” Role of Controls.” IMF Staff Position Note No. SPN/10/04, http://www. Publication No. 38, http://www.bis.org/publ/cgfs38.htm. imf.org/external/pubs/ft/spn/2010/spn1004.pdf. De la Torre, Augusto, and Alan Ize. 2009. “Regulatory Reform: Integrating Svensson, Lars E. O. 2010. “Inflation Targeting and Financial Stability.” Policy Paradigms.” World Bank Policy Research Working Paper 4842, Washing- Lecture at the CEPR/ESI 14th Annual Conference on “How Has Our ton, DC. View of Central Banking Changed with the Recent Financial Crisis?” Oc- Drehmann, Mathias, Claudio Borio, Leonardo Gambacorta, Gabriel Jiménez, tober 28–29, Central Bank of Turkey, Izmir. and Carlos Trucharte. 2010. “Countercyclical Capital Buffers: Exploring Wadhwani, Sushil. 2008. “Should Monetary Policy Respond to Asset Price Options.” BIS Working Paper No. 317, Monetary and Economic Depart- Bubbles? Revisiting the Debate.” National Institute Economic Review 206 ment, http://www.bis.org/publ/work317.htm. (March): 25–34. The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. They are produced by the Poverty Reduc- tion and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at: www.worldbank.org/economicpremise. 7 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise