Q&A on the Macro-Prudential Policy Framework

Q:We frequently hear the central bank and the State Administration of Foreign Exchange (SAFE) speak of macro-prudential policy framework or macro-prudential management.  How did these terms come about and what exactly do regulators mean when they use the terms?

A:Since the financial crisis broke out in the United States in 2008，government agencies around the world，especially central banks，have been rethinking how they identify risks in a timely manner. They need to cope with crises and reduce risks in an open economic environment. Such issues need to be addressed by macro-controls and financial supervision. The concept of a macro-prudential framework or management is used in this context. It is，however，something that continues to generate a good deal of discussion.

So what sort of regulatory activities would you say come under the concept of macro-prudential management?

I am afraid there is no precise definition. The concept of macro-prudential management is still a work in progress. At present，there is neither sufficiently mature international experience nor a fixed domestic model to be used as a reference. In academic circles and among regulators there are various explanations as what measures are covered by these terms，such as counter-cyclical management，the use of the so-called Tobin tax，withholding deposits，the variable function increase and the like. I don't believe there is a universally agreed on definition. However，the main objective of these policy measures is to prevent systemic financial risks. That much is clear.

Q:From the perspective of the central bank，what is the relationship between macro-prudential management and monetary policy?

A: The objectives of monetary policy are clear. They include the goal of balancing supply and demand of liquidity，stabilizing the value of the currency，preventing inflation and deflation，and maintaining a stable and healthy economy. Macro-prudential management should be an extension of this effort so we can say it is a practical application of monetary policy. We could also think of it as part of the regulatory policy toolbox.

Q:

What would you say are the chief characteristics of macro-prudential management?

A:

From my perspective，there are several important areas. First and foremost there is the macro level nature of the concept. It refers to an  abstract concept rather than a specific organization like the central bank or SAFE. It refers to the use of market-oriented measures to adjust imbalances between supply and demand or other potential  imbalances. That differs from the targeted supervision of a specific organization at the micro-level. Second，there is the forward-looking aspect of this kind of macro-management. It should be seen as guiding or anticipating future events. Cyclical fluctuations，for example，are the law of a market economy. Anticipation of those fluctuations is part of this macro-prudential process. Prudential refers to the prevention of crisis，and once again we see where anticipation plays a role. By introducing counter-cyclical functions in policy management we are trying to guide or anticipate market events.

Additionally，we have our portfolio of policy tools. Most traditional regulation employs quantitative instruments. However，macro-prudential measures are introduced more as structural instruments，su