Financial Stability Committees and Basel III Macroprudential Capital Buffers

44 Pages Posted: 18 May 2020

See all articles by Rochelle M. Edge

Rochelle M. Edge

Board of Governors of the Federal Reserve System

Nellie Liang

Brookings Institution

Date Written: February 18, 2020

Abstract

We evaluate how a country’s governance structure for macroprudential policy affects its implementation of Basel III macroprudential capital buffers. We find that the probabilities of using the countercyclical capital buffer (CCyB) are higher in countries that have financial stability committees (FSCs) with stronger governance mechanisms and fewer agencies, which reduces coordination problems. These higher probabilities are more sensitive to credit growth, consistent with the CCyB being used to mitigate systemic risk. A country’s probability of using the CCyB is even higher when the FSC or ministry of finance has direct authority to set the CCyB, perhaps because setting the CCyB involves establishing a new macro-financial analytical process to regularly assess systemic risks and allows these new entities to influence the process. These results are consistent with elected officials creating the FSCs with the strongest governance and fewer agencies for functional delegation reasons, but most FSCs are created for symbolic political reasons.

Keywords: Delegation; Financial stability committees; Credit growth; Macroprudential policy; Countercyclical capital buffer; Bank regulators

JEL Classification: G21; G28; H11; P16

Suggested Citation

Edge, Rochelle M. and Liang, Nellie, Financial Stability Committees and Basel III Macroprudential Capital Buffers (February 18, 2020). FEDS Working Paper No. 2020-16, Available at SSRN: https://ssrn.com/abstract=3601229 or http://dx.doi.org/10.17016/FEDS.2020.016

Rochelle M. Edge (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
(202) 452 2339 (Phone)
(202) 736-5638 (Fax)

Nellie Liang

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

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