| Abstract: |
Since the global financial crisis of 2007-09, policy makers and academics
around the world have advocated the use of prudential tools for
macroprudential purposes. This paper presents a macroprudential tabletop
exercise that aimed at confronting Federal Reserve Bank presidents with a
plausible, albeit hypothetical, macro-financial scenario that would lend
itself to macroprudential considerations. In the tabletop exercise, the
primary macroprudential objective was to reduce the likelihood and severity of
possible future financial disruptions associated with the hypothetical
overheating scenario. The scenario provided a path for key macroeconomic and
financial variables, which were assumed to be observed through 2016:Q4, as
well as the corresponding hypothetical projections for the interval from
2017:Q1 to 2018:Q4. Prudential tools under consideration included
capital-based tools such as leverage ratios, countercyclical capital buffers,
and sectoral capital requirements; liquidity-based tools such as liquidity
coverage and net stable funding ratios; credit-based tools such as caps on
loan-to-value ratios and margins; capital and liquidity stress testing; as
well as supervisory guidance and moral suasion. In addition, participants were
asked to consider using monetary policy tools for financial stability
purposes. Under the hypothetical scenario, participants found many prudential
tools less attractive due to implementation lags and limited scope of
application and favored those deemed to pose fewer implementation challenges,
such as stress testing, margins on repo funding, and guidance. Also, monetary
policy came more quickly to the fore as a financial stability tool than might
have been thought before the exercise. The tabletop exercise abstracted from
governance issues within the Federal Reserve System, focusing instead on
economic mechanisms of alternative tools. |