They also support the case for clarity in the application of these regulatory policies. Not least given its newness, there may be further to go clarifying the motivation behind macroprudential interventions and the circumstances which might justify different macroprudential instruments - in short, in defining and refining the macroprudential policy reaction function. The UK’s Financial Policy Committee has made some progress in this area, most notably in setting out its strategy for using the countercyclical capital buffer (Bank of England (2016a)). A discussion of the principles underlying the UK’s approach to macroprudential policy can be found in Brazier (2017a). The benefits of pursuing this path are clear from monetary policy experience (Brazier (2015)). Increasing the predictability of policy can enhance the ex-ante signalling and expectations channels of regulatory policy, as has been achieved in relation to monetary policy (Bernanke and Mishkin (1997)). It enhances ex-post accountability to stakeholders, political and societal. And it reduces the potential behavioural biases otherwise associated with discretionary decision-making and which have been found in the past to affect discretionary regulatory policy, including regulatory capture (Dal Bó (2006)) and defensive decision-making (Gigerenzer (2014)). At the same time, there is clearly a balance to be struck. As Greenwood et al (2017) argue, strict rules-based systems are likely to be arbitraged and exploited by banks. For example, recent theoretical work and experimental evidence suggests remuneration contracts can be restructured to recreate the excessive risk-taking incentives that new rules seek to reduce (Thanassoulis and Tanaka (2017), Harris et al (forthcoming)).
Essentially there is a risk that the single monetary policy - the single, one-size-fits-all, short-term interest rate - within the euro area, which is a necessary corollary of the single currency, will not in the event prove to be appropriate to the domestic needs of each of the euro-member countries. There is no doubt that such risks exists. They may result from cyclical divergence. They may arise from differences in fiscal positions even though these are to be constrained through the Stability Pact. Or they may result from economic shocks of some sort that have a bigger impact on some countries than on others. The rise in oil prices in the early 1970’s or German reunification are classic examples. So the risk of divergent monetary policy needs within the euro area is real. And the damage it could cause if serious tensions between member countries were to emerge is substantial, because alternative adjustment mechanisms, such as labour migration or fiscal redistribution, that exist within individual countries, and which help to alleviate the similar regional tensions that arise at the national level, are simply not well-developed at the pan-European level.