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IMF says no 'panacea' for systemic risk

Tuesday 3 May 2011 - by Andrew Hickley

An influential member of the International Monetary Fund has called for further integration between monetary and fiscal policies, admitting that even the most effective macroprudential policy framework cannot be a "panacea" for dealing with systemic risk. 

Speaking at a conference hosted by the European Commission and European Central Bank on Monday, financial counsellor and director José Viñals called for collective worldwide efforts to change the approach to dealing with systemic risk. 

"To deal effectively with this destructive threat [systemic risk], macroprudential policy has to be supported by other policies relating to the financial sector and the macro-economy," he said, noting that national changes in reforming macroprudential tools have been "uneven".

"This may require some changes in the way in which monetary policy and fiscal policies operate."

Viñals admitted that central banks would have to take a key role in the process, with elected finance ministries taking a step backwards because of associated political risks.


He argued that because of election cycles and political considerations, they may be reluctant "to take the punch bowl away when the party gets going".

This could then lead to a "crucial delay" in the application of macroprudential measures, meaning their involvement remains largely in the designing of legislative measures rather than their implementation.

"So, finance ministries should be involved, but in a way that does not jeopardise the process," he said, arguing that central banks should take the lead.
 
This is owing to their "analytical expertise" that can help achieve "greater clarity about the benefits and costs" of these policies, he added. 

"They also bring much-needed reputation and independence. Finally, 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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