Is There Macroprudential Policy Without International Cooperation?
In this paper we address three questions: (1) Does global finance require a common prudential standard? (2) Does global finance require international cooperation in overseeing the system's safety and soundness? And (3) does global finance require notification, cooperation and coordination of dynamic regulatory policy adjustments? Our answer to the first question is that global finance does require a common prudential standard, defined as a level of required resilience, applied appropriately to all parts of the financial system. Without adoption of a common resilience standard, the international financial system will fragment and balkanize. In addressing the second question, we explain why shared, collective analysis is necessary to identify and mitigate stability threatening shortfalls against that standard for resilience. This will be possible only with increased public and private transparency. Finally, we examine the daunting, but essential, task of implementing a dynamic prudential framework that maintains the system's resilience even as its structure and risk taking behaviors change. The policy implications of our analysis focus on the need for global agreement, implementation monitoring, information sharing and even, sometimes given damaging spillovers, collective regulatory responses to emerging threats. Institutions will need to be adapted to make all this feasible.