Table Of ContentSystemic Risk, Crises, and Macroprudential Regulation
Systemic Risk, Crises, and Macroprudential Regulation
Xavier Freixas, Luc Laeven, and Jos é -Luis Peydr ó
The MIT Press
Cambridge, Massachusetts
London, England
© 2015 Massachusetts Institute of Technology
All rights reserved. No part of this book may be reproduced in any form by any electronic
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This book was set in Palatino LT Std 10 on 12 pt by Toppan Best-set Premedia Limited.
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Library of Congress Cataloging-in-Publication
Freixas, Xavier.
Systemic risk, crises, and macroprudential regulation / Xavier Freixas, Luc Laeven,
and Jos é -Luis Peydr ó .
pages cm
Includes bibliographical references and index.
ISBN 978-0-262-02869-1 (hardcover : alk. paper) 1. Monetary policy. 2. Finance–
Government policy. 3. Economic policy.
4. Financial crises. 5. Risk. I. Laeven, Luc. II. Peydr ó , Jos é -Luis.
III. Title.
HG230.3.F744 2015
339.5--dc23
2014034226
10 9 8 7 6 5 4 3 2 1
Contents
Foreword vii
Glossary xi
1 Introduction 1
2 A Primer on Systemic Risk 13
3 Systemic Risk: A Theoretical Framework 47
4 The Buildup of Financial Imbalances 73
5 Contagion 109
6 Systemic Risk and the Real Costs of Financial Crises 143
7 Measuring Systemic Risk 163
8 Systemic Risk and Microprudential Regulation 199
9 Systemic Risk and Macroprudential Regulation 251
10 Monetary Policy and Systemic Risk 291
11 New Challenges for Regulatory Policy 329
Appendix Data 367
Notes 395
References 417
Index 459
Foreword
Macroprudential is the latest buzzword in economics. But it means
different things to different people. For some, macroprudential policy
is about managing the economic cycle. For others, it is about controlling
financial stability stemming from systemic financial institutions. For
others, it is simply an empty term. These skeptics hold the view that
macroprudential policy has no teeth because the political economy of
booms is such that financial regulators will always find it hard to
smooth them, as booms bring large benefits (in the form of wealth and
employment) while they last. Some go even further and claim that
macroprudential policy may bring new risks when misused. Unfortu-
nately, there is much confusion about what constitutes macropruden-
tial policy and little agreement about how to operationalize it, in part
because its objective is not clearly defined and in part because there is
scarce historical experience about the use of macroprudential tools to
gauge their effectiveness and calibration. Moreover the measurement
and the theory of financial fragility and systemic risk of the financial
system is still in its infancy, and there is little agreement on the scope
of financial regulation and the institutional framework for macropru-
dential policy. What are the strengths and limitations of the current
prudential policy framework and how should it change? What are the
differences between micro- and macroprudential policy? What is the
boundary of financial regulation? Should it cover all institutions that
engage in the provision of financial services? What are the limitations
of current theories of financial fragility and systemic risk? And how
can systemic risk be measured and monitored in real time? What
lessons can be drawn from the history of the financial crises, including
the most recent one, for the management of credit and asset price
bubbles and bursts? How should macroprudential policy interact
with macroeconomic policy? Is there any role for monetary policy for
viii Foreword
combatting systemic risk? Does macroprudential regulation always
reduce excessive risk-taking or can it also encourage it?
The purpose of this book is to offer a framework to operationalize
macroprudential policy. We will define systemic risk and macropru-
dential policy, discuss its differences with microprudential policy and
its interactions with macroeconomic policies (notably monetary policy),
and describe the macroprudential toolkit and experiences around the
world with a view to operationalize macroprudential policy to fit to
country circumstances (whether emerging economies or advanced
economies). We conclude with a list of challenges in the implementa-
tion of macroprudential policy and discuss its limitations.
To our knowledge, this is the first and only book on this topic. By
design, some topics are covered in more detail than others. This is in
large part because our knowledge on these issues is still limited, as this
is a new field. In particular, there is disagreement about the optimal
policy mix and the measurement of systemic risk. And there is large
uncertainty about the unintended consequences of macroprudential
policy on systemic risk and the constraints imposed by polical economy
forces. But there is much that we can offer, based on a growing body
of academic and policy-oriented literature, the history of financial
crises, and the limited historical experience with the use of macropru-
dential policy. Moreover much has happened since the global financial
crisis of 2008 to shape a new regulatory framework for deposit-taking
financial institutions with a view to build a system of regulations that
take a more macro perspective of the financial system with a focus on
managing systemic risk rather than the risk of individual financial
institutions, and macroprudential authorities have been established in
a number of countries with responsibilities in the area of macropruden-
tial policy.
This book has grown out of our desire to offer clarity in an area of
much confusion, drawing on our combined knowledge in this area
based on academic research, policy and advisory work. Our focus is
on the United States and Europe where much of the debate about mac-
roprudential policy has centered, but we will also cover topics relevant
to other parts of the world, including the role of macroprudential policy
in managing foreign capital flows and the need for global coordination
of macroprudential and monetary policies.
But knowledge and sweat and tears from hard work alone cannot
create a book. It requires close cooperation and team work, and the
joy of working together, which in our case has translated into new
Foreword ix
friendships. Being physically located in different parts of the world did
not help, but Skype and occasional trips offered solutions. A book like
this one always takes more time than originally envisaged. This book
would not have been possible without the continued support and pro-
fessional editorial work of Jane Macdonald and Emily Taber at the MIT
Press. The diligent editing work by Dana Andrus at the MIT Press and
the editorial assistance from Maria Jovanovic and Patricia Loo at the
IMF are also gratefully acknowledged.
We would also like to thank Olivier Blanchard, Christian Brownlees,
Charles Calomiris, Stijn Claessens, Charles Goodhart, Enrico Perotti,
Raghu Rajan, and Fran R. Tous for commenting on earlier drafts of the
book. The sometimes long debates with our colleagues and friends
have markedly improved the quality of this book. Part of this book has
been taught at the Barcelona GSE professional course on Systemic Risk
and Prudential Policy that Xavier and Jos é -Luis organized and we
thank all the participants (mainly from central banks and supervisory
agencies) for all their comments and suggestions. Above all our thanks
go to our families who gave us the precious time to work on this book.
Jos é -Luis especial thanks go to his wife, Lambra Sa í nz Vidal, and his
parents.
The book was written while Luc Laeven was a staff member of the
IMF. This book represents our own views, not those of the IMF or IMF
Board.
Barcelona and Washington, DC, November 2014
