Chananun Supadulya

Talking about central bank policies, the two traditional and mostly known tools are interest rates and microprudential measures. The former, as a monetary policy tool under the inflation targeting (IT) regime, is aimed at achieving price stability, thereby supporting sustainable economic growth and employment. The latter, such as required capital ratio, single lending limit, and good governance, is used to prevent individual banks falling into distress. Policies assigned to maintain stable prices and an individually healthy bank were thought to be sufficient in building a robust financial system and strong economy.

Nonetheless, the recent global financial crisis has underlined limitations of relying solely on these two policy tools. First, while each bank is individually safe and sound under the microprudential policy framework, their collective behaviour can induce risks and vulnerabilities to the overall financial system. Second, the policy interest rate under the IT regime is a central bank's main tool to maintain the stability of price levels in general. It might not be the most effective tool to curb excessive price movements of particular assets.
As a result, the so-called "macroprudential policy" has emerged in importance to complement the current set of policy tools with an objective to prevent the build-up of systemic risk that may lead to financial and economic distress. Unlike microprudential policy, the objective of this tool focuses on the wider economy, ensuring financial system stability and smooth progress of the macroeconomy.

In order to maintain financial stability and contain systemic risk, the Basel Committee on Banking Supervision (BCBS) has brought macroprudential policy tools under the standards of financial supervision of the Basel III framework in an attempt to emphasise its importance. The new capital standard under Basel III adds the Basel II capital requirement with two buffers - a capital conservation buffer and a countercyclical buffer. The latter, in particular, lies on the concept that banks should build up capital in good times to be used as a cushion during bad times. Implementing both buffers together should enhance banking sector resilience and mitigate the aggravation of the business cycle due to financial distress (procyclicality).

The Bank of Thailand (BOT) has long appreciated the importance of macroprudential policy. Since 2003, the minimum loan-to-value (LTV) ratio for high-value housing loans and some restrictions on credit cards and personal loans have been implemented. These macroprudential policies are to limit the excessive credit risk due to overly high credit growth in those sectors. As the excessive credit risk might result in imbalance with adverse impacts on resilience in the financial system, curbing the high growth of loans in those sectors helps mitigating risk in the financial system.

The macroprudential policy formulation is presently included in the BOT's financial stability framework under the Subcommittee on Financial Institution System and Financial Market Stability. Apart from monetary policy and microprudential policy, macroprudential policy is another jigsaw that will help enhance effective implementation of the financial stability policy in Thailand.

The opinions expressed in this article are the author’s own and do not necessarily reflect the official opinion of the Bank of Thailand.