In the wake of the financial crisis, the arsenal of macroprudential tools has expanded significantly. Apart from the countercyclical capital buffer we have the systemic risk buffer, the buffers for globally and domestically systemic banks, the possibility to limit large exposures, increase capital or revise risk-weighted assets to residential and commercial real estate exposures. This is a significant improvement that will allow us to develop macroprudential policies that interact with microprudential ones as well as with monetary policy. But it is not enough to create macroprudential tools. They must be properly allocated institutionally in order to avoid inaction bias by policy-makers and counteract misalignment of incentives with the financial sector, in particular at certain points in the lending/financial cycle where taming is needed. In a sense, the dilemmas and incentives that policy-makers will face regarding macroprudential policy decisions will not be far different from those encountered in the past when setting monetary policy (i.e. interest rates). For the latter, the optimal institutional design is to enshrine monetary policy in an independent central bank. For the former, a very similar solution, intuitively, should prevail, although the theoretical framework and the empirical research to support it is much less advanced than in the monetary field. Needless to say, macroprudential policy is particularly relevant for a country like Spain, part of a monetary and banking union where, as seen in the past, the financial and business cycles of the member countries may be in different positions.
Among the G7 economies, external balance sheet ratios are broadly flat at around twice nominal GDP. This flatness is driven in large part by assumption, as it is assumed the highest-income countries maintain a flat ratio of external assets to GDP. This is almost certainly too extreme an assumption. Although smaller than in the past, there remain strong home biases in the investment portfolios of developed countries’ institutional investors (Obstfeld and Rogoff (2000) and IMF (2010)). As liberalisation progresses, these biases would be expected to unwind, boosting gross external assets in relation to GDP in developed countries. For that reason, the calibration here can be thought of as a limiting case of the likely adjustments in the pattern of global capital flows. Subject to that important caveat, the growth in the non-G7 economies’ contribution to global capital markets is still striking. Among the BRICs, external balance sheets as a fraction of GDP exceed G7 levels by around 2035. By 2050, they are around 2.5 times nominal GDP. These patterns are even more striking when expressed as a share of global external assets. By 2050, over half of all G20 external assets are associated with the BRICs, up from around 9% currently (Chart 18). Among the non-G7, non-BRIC G20 countries, their share trebles from 5% to around 15%. Within this, some countries’ share of global assets sky-rocket. China’s share of global finance rises to around 30% by 2050, roughly that of the entire G7. India rises to almost 20%, from less than 0.5% currently (Chart 19).