Macroprudential Governance and Capacity to Remove the Punch Bowl

While the merits of a macroprudential approach to financial regulation are now taken for granted, there is little consensus on which authority to lead the charge. It is, however, often assumed that delegating such powers to independent central banks will limit the interference of short-term political considerations and hence strengthen macroprudential capacity. This paper tests this hypothesis leveraging a newly computed index of macroprudential institutional arrangements for 58 countries in the post-global financial crisis period and finds contrasting results: when in charge, independent central banks are less likely than Ministries of Finance to tighten macroprudential policy in the expansion phase of the credit cycle. This is especially the case for more visible and unpopular tools such as loan-to-value caps compared to less visible measures such as capital requirements. However, the mere existence of financial stability committees coordinating ministries and central bank positions appears to condition macroprudential regulators’ policy reactions. The paper concludes by discussing different explanations for such institutional behavior to be tested in future work.