Various jurisdictions in Asia such as Singapore, Hong Kong, and Indonesia have used macroprudential measures to reduce risks to their domestic financial systems and to dampen the impact of economic shocks, such as the application of loan-to-value limits for mortgage borrowings. However, the detailed impact of macroprudential policies is arguably less well understood. 21 There are research challenges in this regard. For example, the Bank for International Settlements (BIS) highlighted that the impact of tools are likely to vary across jurisdictions based on their domestic circumstances and phase of the financial cycle. A key focus area is how best to study the spillover impact across jurisdictions from a macroprudential policy decision point of view. 22 Another challenge relates to effectiveness. Macroprudential tools have largely been employed in more recent years, and isolating their effectiveness from other measures will require further studies. 23 In this context, it may be remiss of me not to mention the apparent artificial divide that has existed between the analysis of the financial vis-à-vis the real sides of the economy. During the GFC, I recall some criticism that economists used mathematical models that did not sufficiently factor the critical roles that banks and other financial institutions play in the economy. 24 Since then, important strides have been made, including in the workhorse Dynamic Stochastic General Equilibrium (DSGE) models used at central banks, to better capture the key interactions between the financial sector and the rest of the economy.
And it is important that plans are legally robust and that they are regularly tested. Another lesson from the recent episode is that disclosure practices in relation to liquidity risk management objectives, controls and metrics vary significantly. In some cases banks go as far as providing information on stress tests and contingency funding plans; in others there is a relative paucity of information. That hampers market functioning: in times of heightened uncertainty a lack of information can lead to defensive reactions by market counterparties that provision of additional information could prevent. There are some risks from greater disclosure. For example, a bank revealing a weak funding position could precipitate an adverse reaction, although that should of course lead to stronger risk management as a precaution against that risk. There are also measurement challenges. It is difficult to present a simple, representative summary measure of liquidity risks run by a given bank – any single definition of such a complex array of risks will necessarily be approximate. But that does not seem a sufficient reason not to disclose any measure – indeed there may be some parallels with market risk where a single metric such as a firm’s overall value-at-risk is not viewed as encapsulating all dimensions of such risk. Nonetheless, the degree of disclosure on market risks which banks are now providing under Pillar 3 of the Basel II Accord marks a definite improvement in this area.