Executives at Zurich Insurance Group, Swiss Re, and other financial institutions are formally backing regulations to limit financial risk that hit middle ground, striking a balance between financial stability and economic growth.
Fifteen CEOs, chairmen and other senior executives of large financial institutions in Europe and North America signed onto the statement that supports what are known as “macroprudential policies.” The policy position was developed and published by the World Economic Forum, working with Oliver Wyman, and discussed at the World Economic Forum’s 2015 annual meeting in Davos.
Michel Liès, CEO of Swiss Re, said in prepared remarks that “macroprudential policies could support financial market stability and thus long-term investors’ ability to provide risk capital to the real economy.”
As the group’s statement explains, there are typically two types of macroprodential policies.
One category would involve structural policies that limit risks of a financial crisis and are in effect at all times. The other – time-varying tools – would look more broadly at curbing the credit cycle “to constrain excessive credit build-up toward favored asset classes or more generally at moments of exuberance within business cycles,” the policy statement reads.
Using both types of policies requires policymakers to make detailed decisions about policies and when they should change, and also potentially varying a policy stance “across sectors and asset classes.”
An embrace of macroprudential policies would be somewhat retro. According to the statement, they were used in advanced economies before the 1980s, and in some emerging markets since the 1990s.
“It is now often argued that the implementation of macroprudential measures is a source of stability for the financial system,” according to the document.
So why would macroprudential policies be useful now, in the wake of the 2007-8 financial crisis?
The group argues that using the policy approach “helps to address emerging market inefficiencies in the financial system, such as over-exuberance within asset classes …. in real estate lending.”
As well, the concept would be a necessary element in the financial system, the group said, because it would give regulators both “the mandate and responsibility” to deal with standalone regulated companies as well as broader financial system risks.
That said, the executives urge caution, because macroprudential policies could generate “unknown risks” and lead to societal trade-offs.
Liès added that “applying a one-size-fits-all approach, however, should be avoided and unintended consequences monitored.”
Source: World Economic Forum