According to the academic literature, when interest rates are close to zero, non-conventional monetary policy may come in three different forms: first, management of agents expectations through a commitment by central banks to keep interest rates low for a long period of time; second, increasing the balance sheet of the central bank; and, third, changing the composition of assets in the balance sheet of the central bank. The FED, the Bank of Japan and the Bank of Canada, have made use of the first kind of instruments aimed at managing expectations. Therefore, they have made announcements about the future path of interest rates to affect the agents’ expectations about long-term rates. However, the non-conventional monetary policies more widely used since 2008 have been of the second and third kind, that is, the ones affecting the size and composition of the central bank’s balance sheet. In the euro area, the ECB changed its liquidity tenders to a fixed-rate system, with unlimited amount. In order to remove uncertainty, it increased their maturity up to three years. It also set up a program to purchase covered bonds and introduced the Securities Market Program and the Outright Market Transactions Program to ensure proper transmission of monetary policy during the shocks of the sovereign debt crisis. The Securities Market Program was not a quantitative easing instrument, since purchases were later sterilized.
It requires instruments that impose tighter standards for individual institutions whose contribution to system-wide risk is larger, the so called Global Systemically Important Financial Institutions (G-SiFis), whose list was last updated by the Financial Stability Board (FSB) in November 2012. The second one, looks at how aggregate risk evolves over time. This requires the use of instruments that contribute to moderate the typical pro-cyclicality of the financial system. I will come to that later on, when commenting on the new Basel III capital framework. Before this, allow me to mention the Spanish experience with the so-called “dynamic” or “statistical provisions” which were introduced in 2000. This can be considered a pioneering case of a macroprudential response. The tool proved to be useful in Spain during the financial crisis in the two dimensions identified earlier: mitigating the build-up of risks – even if to a limited extent – and providing capacity of loss absorption to the banks. But the Spanish experience also showed that “dynamic provisions”, although, in my opinion, well targeted and designed, should have been complemented with other instruments. In order to develop and implement this new policy, the main developed economies have created new authorities in charge of macro-prudential supervision, such as the Financial Stability Oversight Council in the United States or the Bank of England’s Financial Policy Committee.