Macroprudential Policy: Case Study from a Tabletop Exercise
October 14, 2015
A new study presents a macroprudential tabletop exercise that was aimed at confronting Federal Reserve Bank Presidents with a hypothetical, macro-financial scenario that would lend itself to macroprudential considerations.
The primary objective of this exercise was to reduce the occurrence and severity of major financial crises and the possible adverse effects on employment and price stability. This objective focuses on economy-wide financial stability and differs from the Fed's monetary policy objectives of full employment and stable prices.
The scenario featured a compression of U.S. term and risk premia through the end of 2016, which keeps financial conditions loose and fuels valuation pressures in U.S. financial markets.
Financial system disruptions that macroprudential objectives aim to avoid include:
- Fire sales in financial markets and destabilizing runs on banking and quasi-banking institutions.
- Shortages of money-like assets and disruptions in credit availability to the non-financial business sector.
- Unwarranted spikes in risk premia and disorderly dissolution of systemically important financial institutions.
- Excessive spillovers in international funding and currency markets, and disruptions of the payments system.
Committee members agreed that the most immediate risks to financial stability present in this hypothetical scenario include financial conditions being too loose relative to the macro conditions, reliance on short-term wholesale funding provided by non-bank financial institutions, and elevated commercial real estate prices which in a downturn could have an adverse effect at the macro level.
Committee members also expressed interest in using stress test scenario design for macroprudential objectives and suggested the use of monetary policy in addition to prudential tools.
Source: Tobias Adrian, et al., "Macroprudential Policy: Case Study from a Tabletop Exercise" Federal Reserve Bank of New York, September 2015.
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