An Exercise in Macroprudential Policymaking
March 24, 2016

A new Federal Reserve Bank of New York study examines a June 2015 tabletop exercise in which five Federal Reserve Bank presidents were presented with a hypothetical scenario that would lend itself to macroprudential considerations. Participants were asked to consider the effectiveness of various macroprudential policy approaches in averting or moderating the financial disruptions that were likely to occur in the scenario. Many of the prudential tools considered were deemed to be unattractive owing to implementation lags and limited scope of application, while those that posed fewer implementation challenges were favored, providing a glimpse into how policymakers might react to an adverse macroprudential scenario.  

In their study, Tobias Adrian, Patrick de Fontnouvelle, Emily Yang and Andrei Zlate describe the tabletop exercise that was conducted by members of the Financial Stability Subcommittee of the Conference of Presidents of the Federal Reserve Banks last June. Participants were asked to identify the risks to financial stability in a scenario that featured overheating financial markets. They were then asked to consider several types of prudential tools, including capital-based tools, liquidity-based tools and credit-based tools, in pursuing macroprudential objectives under the hypothetical scenario. Participants also considered the use of stress testing, supervisory guidance and moral suasion, as well as monetary policy action.

Of the full range of tools considered, many of the prudential tools were found to be less attractive because of implementation lags and limited scope of application. The prudential tools most favored by participants were those that posed fewer implementation challenges, in particular stress testing, margins on repo funding, and supervisory guidance. It is also notable that some participants opted for monetary policy as a financial stability tool.

Tobias Adrian is a senior vice president in the Federal Reserve Bank of New York’s Research and Statistics Group, and Emily Yang is an assistant vice president in the Bank’s Supervision Group. Patrick de Fontnouvelle is a vice president and Andrei Zlate is a senior financial economist at the Federal Reserve Bank of Boston. Their study will be published in a forthcoming edition of the Economic Policy Review.

Macroprudential Policy: A Case Study From a Tabletop Exercise »

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