A Liquidity-Based Approach to Macroprudential Policy

It is widely recognised that an excess of credit caused the financial crisis. In the future, one objective of macroprudential policy will be to regulate the financial cycle in order to prevent the disruptions associated with booms and busts. Tools have been available for a long time to regulate credit in specific sectors or categories, such as loan-to-value or loan-to-income ratios, as well as margin requirements. New instruments are now being developed at the aggregate level, first of all the countercyclical capital buffer. All share a common feature: they rely exclusively on the direct control of leverage. Full publication: Macroprudential Policy