Practical Guidance on Macroprudential Finance-Regulatory Reform

The following post comes to us from Robert Hockett, Professor of Financial and International Economic Law at Cornell Law School.

The global financial troubles of 2008-09, with whose debt-deflationary macroeconomic consequences [1] the world continues to struggle, [2] exposed weaknesses in many financial sector oversight regimes. Most of these had in common their focus on the safety and soundness of individual financial institutions to the exclusion of the stability of financial systems as wholes—wholes whose structural features render them more than mere sums of their institutional parts.

A number of academic, governmental, and other finance-regulatory authorities, myself included, [3] have accordingly concluded that an appropriately inclusive finance-regulatory oversight regime must concern itself as much with the identification and mitigation of systemic risk as with that of institutional risk. Once primarily ‘microprudential’ finance-regulatory oversight and policy instruments, in other words, are now understood to be in need of supplementation with ‘macroprudential’ finance-regulatory oversight and policy instruments.

Now because finance-regulatory policy in most jurisdictions is implemented through law, all of the weaknesses inherent in exclusively microprudential finance-regulatory regimes are, among other things, legal problems. They are weaknesses in what some non-American lawyers call existing ‘legal frameworks.’ Many countries in consequence are now looking to update their legal frameworks for finance-regulatory oversight, supplementing their traditional microprudential foci and methods with macroprudential counterparts.

In a new working paper recently posted to SSRN, [4] I aim to assist these efforts in a forthrightly practical way that I hope complements some of my earlier efforts to assist in a more theoretical or ‘gestalt-switching’ way. [5] The paper is the unexpurgated original draft for what subsequently became a much shorter International Monetary Fund (IMF) Board Paper. [6] A working premise of this fuller version is that a revised, macroprudentially-inclusive finance-regulatory legal framework must authorize existing and/or new regulatory agencies to pursue systemic financial stability on the basis of adequate statutory or equivalent mandates, workable divisions of substantive regulatory labor, and effective procedural mechanisms of collaboration among multiple authorities where there is more than one such authority.

Assuming that this working premise is correct, determining how best to adapt an existing legal framework to support the implementation of macroprudential finance-regulatory oversight would seem to require that at least three foundational legal questions be thoroughly addressed: (1) how best to establish or add—via legislation, agency action, or some other means—a suitable mandate for macroprudential oversight against the backdrop of a pre-existing finance-regulatory mandate; (2) how best to harmonize the new substantive aspects of the resultant legal framework with pre-existing substantive aspects of the predecessor legal framework, including in particular those concerned with microprudential oversight and adjacent policy spaces such as monetary and credit-allocation policy; and finally (3) how best to pair and align the resultant new substantive legal framework with a complementary institutional/procedural framework, whether this be pre-existing, newly modified, or newly established.

The paper addresses these foundational considerations in the order just elaborated. It first attempts fully to catalogue the key elements of a statutory or equivalent mandate for macroprudential oversight. It stresses in particular that any such mandate must, at a bare minimum (and in conformity with constitutional and international constraints), lay out both (a) macroprudentially informed substantive behavioral standards to which market actors are to be held, and (b) specific procedural/institutional arrangements, including specific agency powers and obligations, geared toward vindicating those standards. In the course of so doing, the paper also discusses all of the key ‘tools’ in the emerging ‘toolkit’ of macroprudential policy instruments now being tried or considered by regulators worldwide, as well as the principal models of macroprudential regulatory agency structure now being tried or considered in leading jurisdictions worldwide.

The paper next catalogues and elaborates on the legal considerations implicated by the need to harmonize the aforementioned substantive standards laid down by the new macroprudential legal framework with counterpart substantive standards laid down by other, pre-existing legal frameworks—including, again, those for microprudential finance-oversight as well as monetary and credit-allocation policy. In this connection, the paper attends in particular to the legal conundrums that can accompany adaptation of traditional microprudential and monetary policy instruments to macroprudential finance-regulatory uses, as the aforementioned emerging ‘macroprudential toolkit’ does in significant measure.

From these substantive considerations the paper then turns to procedural-cum-institutional considerations, cataloguing and elaborating on the legal challenges raised by the need to design effective agency arrangements geared toward vindicating the mentioned substantive standards. It explains in particular what the legal implications of a variety of alternative institutional models are likely to be, and how a legal basis for effective inter-agency collaboration can be established where more than one agency handles financial regulation and adjacent policy fields. The paper then concludes and looks forward, suggesting that the implementation of macroprudential finance-regulatory policy is a work in progress pursuant to which much of the learning will come from the doing.

The full paper is available for download here.


[1] See, e.g., Robert Hockett & Richard Vague, Debt, Deflation, and Debacle: Of Private Debt Write-Down and Public Recovery, Global Interdependence Center, Federal Reserve Bank of Philadelphia, April 9, 2013, available at
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[2] See, e.g., Daniel Alpert, Robert Hockett, & Nouriel Roubini, The Way Forward: Moving from the Post-Bubble, Post-Bust Economy to Renewed Growth and Competitiveness, New America Foundation, October 11, 2011, available at
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[3] See, e.g., Robert Hockett, Leaning, Cleaning, and Macroprudence, and references therein, posted at this Forum March 27, 2013, available at
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[4] Robert Hockett, Implementing Macroprudential Finance-Regulatory Policy: Legal Considerations, IMF Working Paper, 2013, available at
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[5] See, e.g., Robert Hockett, The Macroprudential Turn: From Institutional ‘Safety and Soundness’ to Systemic ‘Financial Stability’ in Financial Supervision, 8 Virginia Law & Business Review __ (2014) (forthcoming), available at Also sources cited in Hockett, Leaning, Cleaning, and Macroprudence, supra note 3.
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[6] See International Monetary Fund, Implementing Macroprudential Policy—Selected Legal Issues, June 17, 2013, available at
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