Transcript I. Introduction - COMESA Monetary Institute

OVERVIEW OF FINANCIAL STABILITY ASSESSMENT
PROCESS, THE ROLE OF FSDs: RECENT LESSONS AND
DEVELOPMENTS
BY
CHARLES AUGUSTINE ABUKA
DIRECTOR
FINANCIAL STABILITY DEPARTMENT
Bank of Uganda
COMESA COURSE ON FORWARD LOOKING FSRS
29TH OCTOBER 2012
KSMS, NAIROBI , KENYA
CONTENTS OF THE PRESENTATION
I.
INTRODUCTION
II. CENTRAL BANKS AND THE FINANCIAL STABILITY REMIT
III. UNDERSTANDING FINANCIAL STABILITY
IV. THE ROLE OF THE FINANCIAL STABILITY DEPARTMENTS
V. SUMMARY OF RECENT LESSONS AND DEVELOPMENTS
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INTRODUCTION
3
I. INTRODUCTION
• The recent global economic and financial
crisis that started in 2008;
– Has renewed has renewed policymakers’
interest in macroprudential supervision
– Led to a growing awareness that
supervisory and regulatory approaches
lacked a proper “macro” dimension
– Prompted a recognition that the preexisting frameworks for prudential
regulation and supervision had focused
near-exclusively on the management of
the risk of the individual financial
institutions and too little on systemic
risk
“What we know about the global financial crisis is that we don’t know very much...”
Paul A. Samuelson, Economist
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I. INTRODUCTION
– Has led to acknowledgement that soundness of financial
institutions alone does not necessarily amount to financial
stability
– Prompted the use of a holistic perspective on the financial
sector, that pays due consideration to the interconnections
between financial institutions, markets and infrastructure
–Drove many industrialized and emerging economies into
recession
–Resulted in systemic failures
–Shed a spotlight on the imperative for the authorities
responsible for financial stability to strengthen analysis and
surveillance of systemic risk in the financial system and to devise
policy instruments risk mitigation.
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I. INTRODUCTION
• Crisis had not one cause, but several:
– Subprime mortgage as an initial shock
– Fragility of financing infrastructures as initial catalyst:
excessive maturity transformation and leverage
– Banking crisis
• Bailouts, impact on real economy, increased public debt
– Sovereign and banking crisis
– Market failure
• Incentive problems
• Information frictions
• Co-ordination problems
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I. INTRODUCTION
• Failure of regulation and supervision
– Focus on health of individual institutions, not on the
systems health
– National approach while there is a global financial system
– Unregulated parts of the financial system (regulatory
arbitrage)
– No credible resolution regime for systemically important
financial institutions
– Data gaps
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I. INTRODUCTION
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I. INTRODUCTION
Africa: Outrageous Prices, poverty-bargaining for
Food
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I. INTRODUCTION
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I. INTRODUCTTION
It appears the financial crisis was a wake up call to
the world’s advanced economies!
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I. INTRODUCTION
The recent global financial and economic crisis will
require innovations ……….
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I. INTRODUCTION
Africa too will have to provide home grown
solutions….
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I. INTRODUCTION
• A macroprudential approach: An old idea whose time
has come?
• The origins: Concerns over international lending to
developing countries in the late 1970s.
• BIS (1970): Systemic or system-wide orientation of
regulatory and supervisory frameworks and their link to
macro economy.
• In the course of the years the macroprudential
perspective slowly gained further ground, until the
current financial crisis gave it an extraordinary boost.
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I. INTRODUCTION
• A macroprudential approach: An old idea whose
time has come?
• Gaps in the regulatory framework.
• Insufficient resilience of the financial system.
• Distorted incentives inside the financial system such as shortterm remuneration schemes.
• Institutional design of financial supervision that did not
properly reflect the cross border dimensions of the crises.
• Lack of awareness of systemic risk.
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I. INTRODUCTION
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I. INTRODUCTION
• Definition of systemic risk
• ECB
...financial instability becomes so widespread that it impairs the
functioning of the financial system to a point where economic growth and
welfare suffer materially.
• IMF/FSB/BIS
... A risk of disruption to financial services that is caused by an impairment
of all or parts of the financial system and has the potential to have serious
negative consequences for the real economy.
• US
...the failure of the financial company ... Would have serious adverse effects
on financial stability in the United States.
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I. INTRODUCTION
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I. INTRODUCTION
• Types of systemic risk
– Contagion, e.g. Lehman Brothers (Allen and Gale,
2000, King and Wadhwani, 1990).
– Endogenous build up and unraveling of imbalances,
e.g. Asset price bubbles (Minsky, 1977; Kindleberger,
1978).
– Aggregate shocks, e.g. Oil price shock (Gorton, 1988,
Dermirguc-Kunt and Detragiache, 1998).
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I. INTRODUCTION
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I. INTRODUCTION
•Potential sources of systemic risks
–Endogenous risks
•Institutions-based
•Financial (credit market, liquidity) risk, concentration risk, reputation risk,
operational risk
•Markets-based
•Asset price misalignments, counterparty and contagion risk, market runs
•Market infrastructure-based
•Clearance, payment and settlement risk, infrastructure fragility
•Exogenous risks
•Macroeconomic disturbances
•Macroeconomic shocks
•Macroeconomic and policy-related imbalances
•Event risk - Political risk, natural disasters
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CENTRAL BANKS AND THE
FINANCIAL STABILITY
REMIT
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II. CENTRAL BANKS AND THE FINANCIAL STABILITY
REMIT
• Central banks should play a prominent role in the financial stability remit:
– Central banks have expertise in monitoring macroeconomic and
financial market developments. This could help shape policies aimed
at containing the build-up of systemic risks.
– Their existing roles in monetary policy and payment systems, makes
central banks well placed to analyze systemic risks and the impact of
individual bank failure. This analytical expertise can help achieve
greater clarity about the benefits and costs of macroprudential
policies.
– They also bring much-needed reputation and independence.
– Central banks have strong institutional incentives to ensure that
macroprudential policies are effective—because if they are not,
central banks will have to take costly corrective measures.
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II. CENTRAL BANKS AND THE FINANCIAL STABILITY
REMIT
• Best Practice Macroprudential Mandate
– Objective-clear mandate to enhance accountability and
reduce the risk of political pressures
– Institutional arrangements – one size does not fit all, but
central banks should play a leading role
– Tasks, powers and instruments
– Transparency and accountability - prerequisites for good
governance
– Independence – strengthening credibility
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II. CENTRAL BANKS AND THE FINANCIAL STABILITY
REMIT
• Many countries have been experimenting with
macroprudential policies:
– Europe, has launched the European Systemic Risk Board
– Various national institutional arrangements e.g.:
• The Financial Policy Committee in the UK,
• The Financial Regulation and Systemic Risk Council in
France.
• In the US, we have seen the establishment of the
Financial Stability Oversight Council;
• There are similar institutional changes in emerging
market economies such as Mexico and Malaysia.
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UNDERSTANDING FINANCIAL
STABILITY
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III. UNDERSTANDING FINANCIAL STABILITY
• The financial stability
can be enhanced
through;
– Microprudential
analysis
– Macroprudential
analysis
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III. UNDERSTANDING FINANCIAL STABILITY
• Definition and objectives of financial
stability
• Common sense: Achievement of a level of stability in the
provision of financial services (i.e. Lending, insurance,
execution of payments, etc.)
• Bundesbank:
Ability of the financial system to smoothly
perform its key economic functions, even in stress situations
and during periods of structural adjustment.
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III. UNDERSTANDING FINANCIAL STABILITY
•
Systemic Financial Instability
 Widespread distress in the financial system involving the failure of major
financial institutions.
 Consequent failure of key functions of the financial system such as the
payments systems, interbank market, credit extension.
 Systemic risk may build up and lead to a financial crisis even when
individual financial institutions are complying with prudential regulations.
 Thus, sound monetary policy focused on low inflation and conventional
regulation of banks may not be sufficient to prevent systemic crisis..
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III. UNDERSTANDING FINANCIAL STABILITY
•
Systemic Financial Instability
– Financial instability manifests in bank failures, asset price volatility,
collapse of market liquidity and in a disruption in the payment and
settlement system.
– It has the potential to cause significant macroeconomic costs by affecting
production, consumption and investment. Widespread distress in the
financial system which has adverse consequences for the real economy
(credit contraction, disruption to payments system)
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III. UNDERSTANDING FINANCIAL STABILITY
• Financial crisis often follow a sequential
pattern:
– There is a long period in which vulnerabilities build up
often during “good” economic times.
– The build up ends suddenly in a financial crisis.
– The task of systemic regulation is to understand when
vulnerabilities are becoming a serious threat and to
take action.
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III. UNDERSTANDING FINANCIAL STABILITY
Build up of vulnerabilities
•Rapid credit growth
Asset price boom
Crisis / Crash
Increased leverage & debt
Falling risk premiums
Activity
Good times!!
Time
Financial crisis
•Collapse in confidence
Increase in bad credit
Falling asset prices
Illiquidity
Lower investment and risk aversion
Lower growth / contraction of the
economy
Financial distress in major financial
institutions
Disruption of payment systems
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III. UNDERSTANDING FINANCIAL STABILITY
Systemic Financial crises have large output costs:
– Dislocation of markets/intermediation , Disruption to payment and
settlement systems
– Disruption of investment, consumption patterns, lowers economic
growth
– Re-direction of productive resources
– Contraction of money supply and extensive policy intervention (fiscal,
monetary, regulatory)
– Defaults in corporate sectors, bank failures, contraction of credit,
reduced market liquidity, distrust of banking sector
– Political and policy concerns
• High cost to the society
• Bail-out/Government support to companies and banks
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III. UNDERSTANDING FINANCIAL STABILITY
Cost of crises in per capita GDP terms
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III. UNDERSTANDING FINANCIAL STABILITY
Cost of crises in GDP terms
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THE ROLE OF FINANCIAL
STABILITY DEPARTMENTS
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IV. THE ROLE OF FINANCIAL STABILITY DEPARTMENTS
• The Departments should Work closely with other
financial system regulators:
– Financial intermediaries (including banks,
insurers, pension funds, etc)
– Financial markets (as alternative sources of
finance and as links between institutions)
– Financial system infrastructures (clearance,
payment and settlement as well as legal,
regulatory,
accounting
and
supervisory
infrastructures)
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IV. THE ROLE OF FINANCIAL STABILITY
DEPARTMENTS
• Co-ordination with other national agencies
– Ministry of Finance
– Securities /capital markets commission
– Deposit insurance guarantee fund
– Insurance regulatory authority
– Pensions/social security regulatory authority
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IV. THE ROLE OF FINANCIAL STABILITY
DEPARTMENTS
– On-going monitoring of financial stability
• Financial institutions
• Financial markets
• Payment systems
– Regular reporting on financial stability
• FS news (weekly)
• occasional papers
• Semi-annual financial Stability Review
– Macro-prudential analysis
• Financial sector development strategy
• Regulatory policies
• Systemic risk
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IV. THE ROLE OF FINANCIAL STABILITY DEPARTMENTS
Surveillance & monitoring
• Analyse vulnerabilities in the macro
economy and financial sector
• Risk identification
• Early warning systems
Analysis & reporting
• Financial Stability Report
• Stress testing to assess and quantify
systemic risk
• Use of robust models, risk calibration
systems and financial system risk profiles
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IV. THE ROLE OF FINANCIAL STABILITY DEPARTMENTS
Policy recommendations
• Timely assessment and policy advice
• Enhance arrangements for managing a systemic
financial crisis (Crisis response and Management)
• Coordinate policy on financial stability issues
between financial sector regulators (FSSC)
Research and coordination
• Analyse developments within regional
and international markets
• Prepare a framework for financial
stability analysis for Uganda
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IV. THE ROLE
DEPARTMENTS
OF
FINANCIAL
STABILITY
• Research and coordination
– Workshops
– Conferences
– On-going contact with academia
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IV. THE ROLE OF FINANCIAL STABILITY
DEPARTMENTS
• Conduct Financial Infrastructure Oversight
– The departments should
be responsible for macroprudential regulation of the payment systems. They should
take the lead in overseeing the payments systems as a whole.
– Focus should be on policy and risk assessment
– To identify, manage and limit systemic risks; undertake
studies to identify the key risks that may escalate into a
systemic crisis in the payment system, payment instruments,
infrastructure used to transfer large-value payments between
banks and other non bank financial institutions.
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IV. THE ROLE OF FINANCIAL STABILITY
DEPARTMENTS
Communication via the Financial Stability reports
The FSR’s should aim to:
– Review the current health of the aggregate financial
system,
– Identify and analyse potential future threats to
systemic stability,
– Communicate such assessments to the public.
– Focus attention of policy makers on financial stability
issues- Stimulate debate regarding pertinent issues.
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IV. THE ROLE OF FINANCIAL STABILITY
DEPARTMENTS
Focal point for participating in international
efforts to address the issue of systemic
stability.
– Track international developments in techniques of
analysis and measurement as well as policy measures
to curb vulnerabilities:
 Evaluate relevance,
 Incorporate those appropriate to our circumstances,
 Devote resources to study new techniques of analyzing
vulnerability.
 Cross border crisis mitigation
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IV. THE ROLE OF FINANCIAL STABILITY
DEPARTMENTS
• International
– COMESA, Regional Central Banks
– BIS
– IMF
– Other tasks
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IV. THE ROLE OF FINANCIAL STABILITY
DEPARTMENTS
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IV. THE ROLE OF FINANCIAL STABILITY
DEPARTMENTS
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IV. THE ROLE OF FINANCIAL STABILITY
DEPARTMENTS
Compile and maintain a robust data base of
FSI’S
– Focus will be on three areas:
(i) The macro economy (Data readily available).
–
–
–
–
Widening current account deficit,
Rapid monetary growth,
Unsustainable public debt,
Volatility in real interest rates; exchange rates, terms of
trade and inflation.
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IV. THE ROLE OF FINANCIAL STABILITY
DEPARTMENTS
(ii) Asset prices and private sector balances (Data
not always readily available hence need to work with
National Statistical Officess).
–
–
–
–
House prices,
Urban land prices,
Equity prices,
Household and corporate sector debt.
(iii) the financial sector (Data available from offsite
reports in Supervision and payments & settlements).
– Capital adequacy ratios, Asset quality; Earnings and
profitability, Liquidity.
– Large value payments statistics
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IV. THE ROLE OF FINANCIAL STABILITY
DEPARTMENTS
• Consolidate all the FSIs including those generated by
outside institutions.
• Produce periodic Reports for the Financial Stability
Committees.
• Report the FSIs to the IMF.
• Other issues relevant to financial
stability could include:
– Implications of the legislative, regulatory and policy
framework underpinning the financial sector.
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SUMMARY OF RECENT LESSONS AND
DEVELOPMENTS: CHALLENGES FOR
FSDS IN THE COMESA REGION
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V. SUMMARY OF RECENT LESSONS AND DEVELOPMENTS
• A clear understanding of what constitutes macroprudential policy is
required
– We need to lay out a clear understanding of what macroprudential
policy is, and what it is not; and what it can and cannot do.
– Macroprudential policy seeks to limit systemic financial risks by
using (primarily) prudential tools. These prudential tools are
designed to prevent financial instability and the associated social
and economic costs.
– This system-wide perspective is very important, because of the socalled “fallacy of composition” of traditional prudential policy—
that is, actions that are appropriate for individual firms may
collectively lead to, or exacerbate, system-wide problems.
– The complexity of processes that can generate systemic risk, and
the ease with which risk can migrate across the financial system,
call for a focus on the whole range of financial institutions (banks
and non-banks alike), instruments, markets, and infrastructures.
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V. SUMMARY OF RECENT LESSONS AND
DEVELOPMENTS
• Financial stability is a shared responsibility.
– No matter how different policy mandates are structured, ensuring
financial stability is a shared responsibility. Other policies, for which
financial stability is—at most—a secondary objective, should not lose
sight of the systemic consequences of their action, or inaction, and
should not be a source of financial instability.
– An especially prominent role is played by microprudential policy and
monetary policy, both of which affect the amount of risk the financial
system is bears. The larger the buffers created by microprudential
policy, the smaller the need for macroprudential policy to step in.
– Macroprudential and other policies interact in complex ways that are
not yet fully understood.
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V. SUMMARY OF RECENT LESSONS AND
DEVELOPMENTS
– Mechanisms for coordination across policies is required:
• These may take an institutional form, such as a board, a
committee or council, or other forms, such as a requirement for
the macroprudential authority to be informed, or consulted, on
key decisions by other policies, which also affect the financial
system.
• This should be done in a manner that fully respects the
independence of monetary policy. Yet at some point, addressing
systemic risks will also require policy action.
• Coordination will be particularly important if the operational control over the
instruments of macroprudential policy may, or may not, rest with the
macroprudential body itself.
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V. SUMMARY OF RECENT LESSONS AND
DEVELOPMENTS
• One size does not fit all
– In the design of macroprudential policy frameworks, one size does
not fit all.
– The tools to identify and monitor systemic risk, the operational
toolkit, and the chosen institutional set-up will vary from country to
country, depending on the level of development, financial structure,
policy regime, and other historical and political factors.
– The central banks should play a prominent role.
• The other regulatory and supervisory agencies need to be involved in an
adequate manner. They would need to activate macroprudential policy
tools in cases where such tools are not under the operational control of
the macroprudential body.
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V. SUMMARY OF RECENT LESSONS AND
DEVELOPMENTS
• Macroprudential policy is necessary—but it is not a magic bullet
– Macroprudential policy is in its infancy. Many issues remain
unresolved. For example:
• The measurement of systemic risk,
• Evidence that macroprudential policies can, in fact, prevent or
contain credit or asset price bubbles,
• The transmission mechanism of macroprudential policy, the
policy conflicts, and how can they be resolved,
• How micro- and macroprudential policies should relate to each
other
• Addressing the trade-off between stability and efficiency in
macroprudential policy making.
• Resolving these issues is still a daunting task.
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V. SUMMARY OF RECENT LESSONS AND
DEVELOPMENTS
• All this suggests that we need to recognize the limits of what can be
achieved, at least in the near term. Some of the main challenges facing
policymakers include the following:
– Creating a comprehensive analytical framework and a consistent set
of policy tools, including through rigorous back-testing.
- Which tool is best to achieve the prime objective?
- How good is the understanding of transmission channels?
- Methodologies and data needs to calibrate the tools
– Establishing macroprudential authorities, where they are not already
in place, with clear mandates to enhance their accountability and
reduce the risk of political pressures.
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V. SUMMARY OF RECENT LESSONS AND
DEVELOPMENTS
– Assuring that all systemic risks are addressed and all potential policy
conflicts managed through cooperation among national authorities.
– Increasing international cooperation to ensure the consistent
application of national macroprudential policies.
• Cooperation in macroprudential policies can reduce the scope for
international regulatory arbitrage that may undermine the
effectiveness of national policies.
• International cooperation is also needed to contain the risks
associated with systemically important institutions that operate
across borders. The new supervisory and resolution colleges for
cross-border firms will play an important role.
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References
Acharya, V (2009) “A Theory of Systemic Risk and Design of Prudential Bank Regulation”
CEPR Discussion Papers No. 7164.
Bank of England (2009) “The Role of Macroprudential Policy” A Discussion Paper.
Basel Committee on Banking Supervision (2009) “Strengthening the resilience of the
banking sector” Consultative Document, Bank for International Settlements.
Borio, C and Drehmann (2009) “Towards an Operational Framework for Financial Stability:
fuzzy measurement and its Consequences”, BIS Working Papers, No. 284, June.
Caruana, J. (2010), Macroprudential Policy: Working towards a new Consensus, Remarks at
the High-level meeting on “The Emerging Framework for Financial Regulation and
Monetary Policy. IMF Institute, Washington DC.
Ghosh R. Swati (2010) Dealing with the Challenges of Capital Inflows in the Context of
Macro financial Links, Economic Premise, The World Bank, Washington DC.
Moreno, R. (2011) Policy Making from a “macroprudential” perspective in emerging market
economies. BIS Working Papers No. 336.
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Thank you, for listening 