Leaders from financial institutions in Europe and North America, including Swiss Re's CEO, have signed a statement in support of the use of macroprudential policies to underpin financial market stability.
The aim of the statement, which was published by the World Economic Forum (WEF), is to ignite a deciding discussion about how to strike the right balance between financial stability and economic growth.
The 2008/2009 global financial crisis revealed regulatory, corporate and macroeconomic flaws. Since then, the regulatory debate has focused on macroprudential regulation to safeguard financial stability and contain systemic risk. Related policies have been included in the mandate of policymakers of many advanced economies. Additionally, policymakers in many jurisdictions have created bodies specifically responsible for ensuring financial stability. This is a critical step in addressing emerging market inefficiencies in the financial system, such as asset class bubbles, for example in real estate lending.
A word of warning
Banks and insurance companies will, however, require different types of macroprudential regulation. What works for one may be counterproductive if applied to the other. For example, current monetary regulations put pressure on insurers to invest in sovereign bonds rather than in investments that would support economic growth and employment, such as infrastructure investment. This environment of financial repression results in accumulation risk, which may in fact contribute to financial instability.
In the WEF statement, Swiss Re CEO Michel Lies says: "Macroprudential policies could support financial market stability and thus long-term investors’ ability to provide risk capital to the real economy.Applying a one-size-fits-all approach, however, should be avoided and unintended consequences monitored."
Furthermore, while a number of central banks are desperate to avoid increasing policy rates given the still rather fragile global economic outlook, macroprudential tools should complement but not substitute traditional monetary policies.
Despite the significant progress made to date, macroprudential policies are still at an early stage and more needs to be done to fine-tune and better understand whatcan limit the financial cycle swings and their spill-overs to the real economy.We hope that the WEF statement will encourage collaboration between policymakers, industry participants and society at large to make the financial system safer and economic growth more stable.
As a long-term investor, Swiss Re has an inherent interest in financial market stability and given our risk transformation role could also profit from sound macroprudential policies.
- Article in the Swissnewspaper "Tages Anzeiger" (German)
- Read more on the effects of unconventional monetary policies in our report: "Financial repression: The unintended consequences".
Location: Zurich, Switzerland