Reliance on macroprudential tools is problematic in several ways. First, in spite of reforms to the regulation of bank capital, high leverage, regulatory complexity, and public-sector guarantees continue to be hallmarks of the financial systems of advanced market economies. Banks’ asset risks remain opaque. After repeated experience, including the crisis, the market will continue to assume that intermediaries will be rescued as necessary to avoid a new disaster. Macroprudential policy doesn’t fix this problem, but tries to ward off its consequences. There is an alternative path that uses higher regulatory capital standards as an interim step toward gradually eliminating guarantees without destabilizing the financial system.Second, employing macroprudential tools while leaving intermediaries undercapitalized but guaranteed would add layers of regulation that may achieve the purpose of cooling or stimulating risk-taking, but at the expense of raising the inefficiency and evasion costs and risks of regulation. It is an inverse form of regulatory evasion, not by the regulated but by the regulator: the adverse effects of a defective regulatory framework are addressed not by improving the framework but by adding to it. Macroprudential tools also widen the use of discretion in financial regulation, adding to the already-severe problem of on-site supervisors endeavoring to assess risks they are as ill-situated as management and investors to fully understand.Finally, the apparent breathing space for monetary policy that the availability of macroprudential tools offers carries risks. Some proponents of macroprudential policy have made clear that they consider it desirable and practicable to use it as a primary defense against imbalances and vulnerabilities, with monetary policy secondary. In general, however, macroprudential policy will shift the risk assessment of policymakers toward ease and “cleaning up afterwards,” making a repetition of earlier extended episodes of low rates followed by crises likelier.
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