Function and application of the new macroprudential tools available to the Banco de España

Abstract

Following the global financial crisis, banking regulation incorporated macroprudential policy into the authorities’ toolkit with the aim of mitigating so-called “systemic risk”. This is namely the risk of financial instability becoming so widespread that it hampers the functioning of the financial system, to such an extent that economic growth and citizens’ well-being are adversely affected. One of the distinctive characteristics of this risk is that it is multi-dimensional; accordingly, a broad range of specific tools is needed to be able to tackle each of these dimensions. Up to a year ago Spanish regulations, deriving from European regulations, basically provided for macroprudential tools that could bear on banks’ solvency requirements. Since then it has added other tools, some of which are common to other jurisdictions, that allow action to be taken on specific credit portfolios or on specific characteristics of the loans granted by banks. This article sets out these new tools, discussing their main properties and their potential scope for operating in practice. It also reviews some of the challenges that future revisions or future extensions of the macroprudential toolbox may pose.