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To help countries design and implement these policies, known as macro-prudential policy, the International Monetary Fund has developed a new framework to guide countries as they choose approaches best suited to their needs. “This framework is the culmination of a multi-year policy development effort”, said José Viñals, Financial Counsellor to the IMF’s Managing Director. “It is a milestone for the IMF and its member countries because it will help them develop essential crisis-prevention tools.”
The policies can include measures such as loan-to-value ratios to stop excessive mortgage borrowing, or additional capital to increase banks’ resilience to economic shocks.
The IMF said effective macro-prudential policy requires the ability to assess risks to the financial system as a whole, assemble and deploy the right tools to reduce such risk, adjust the scope of financial regulations, and close data and information gaps.
The new policy also requires strong institutions to manage the policies, including a dedicated macro-prudential authority – a single institution or a policy committee – with a clearly defined mandate.