Macroprudential Policy in the EU–Reflections on Institutional Contexts and Governance Arrangements

In response to the global financial crisis, macroprudential policy is now firmly established as a financial policy area to prevent excessive risk taking in the financial sector and mitigate its effects on the real economy. It has become thoroughly integrated in the work programmes of global standard setters and international organisations (FSB, BCBS, IOSCO, IMF, BIS etc.) and in financial regulation at the regional and national levels. However, for macroprudential policy to fulfil its role in curbing systemic risk, it needs to manage several challenges relating to its political sensitivity and institutional context. This policy note discusses these challenges, and maps the current policy debate on the most appropriate governance arrangements to manage them. Thereafter, it provides an overview of macroprudential policy in the EU, both in terms of EU-wide law and regulation, and at the national level. The policy note continues by discussing how institutional contexts and governance arrangements appear to have influenced the exertion of macroprudential policy across EU countries in the post crisis period. Drawing on these findings, this note ends with a presentation of a number of policy conclusions and contrast them with the current international policy debate on macroprudential policy: -Macroprudential policy makers’ inaction biases appear to be best counteracted by appointing a single macroprudential authority with strong transparency requirements. Single authorities display generally more intense policy stances, and are associated with stronger independence and accountability arrangements. Transparency matters since openness and transparency reduce political or other influences: - Both accountability and independence arrangements appear to have weaker power to explain policy outcomes. This does not suggest they are unimportant, but rather that their interaction may matter more than individual effect. However, independence may also lead “self-interest capture” at the expense of public interest. - Policy frameworks that are multi-layered and complex pose conundrums on how to ensure sufficient institutional autonomy and policy capacity among macroprudential authorities. One such example is the Euro zone area, where the ECB has an overlay function in domestic macroprudential policy. - It is unlikely that there is panacea to the policy problems surrounding macroprudential policy. Additional debate, research and policy development in the field of macroprudential policy is especially warranted; not least given its distributional consequences and since it redefines the role of public authority over private interest.