1qGLG9p

76 Deleveraging, What Deleveraging
of a country is the best preventive measure to guard against excessive leverage
and the formation of a crisis.
However, it is impossible to understand trends in debt accumulation,
particularly in the household sector, without appreciating the increase in size
and leverage of the financial sector. Financial regulations aiming at increasing
the resilience of the financial sector are a key ingredient in preventing excessive
debt.
Given the difficulties in predicting the timing and incidence of crises, a primary
policy goal is to ensure that macro-financial systems are resilient in the event of a
crisis. Policy measures to improve resilience include efficient liquidity provision
by monetary authorities, adequate capitalisation levels and orderly resolution
schemes for distressed banks, bankruptcy laws that can efficiently address
private-sector debt burdens and, in related fashion, a sovereign debt restructuring
mechanism (see also Lane, 2013; CIEPR, 2013). At the international level, access
to foreign currency liquidity can be provided by a network of currency-swap
arrangements across central banks and lines of credit from a sufficiently wellfunded
IMF (see also Farhi et al., 2011).
The same motivation applies to fiscal discipline. A strong public sector balance
sheet helps to make a country more resilient in the face of shocks. In the case of
China, for instance, the low level of central government leverage is an element
of strength amid the possibility of strains in other sectors of the economy, as it
was in the cases of Spain and Ireland, which entered the crisis with low levels
of public debt. Accordingly, ensuring that fiscal policy is run in a disciplined,
counter-cyclical manner remains a high priority for policymakers and political
systems.
The last crisis showed that banking regulations and fiscal discipline are not
sufficient tools for crisis prevention and has led to a new focus on macroprudential
regulation. However, while the principles of macroprudential regulation are
straightforward, it is difficult to identify effective intervention mechanisms and
to ensure that such interventions are skillfully implemented. For instance, a
basic problem is the leakiness of macroprudential policies, with a tightening of
regulations on banks driving activities away from banks towards various shadow
banking activities or from domestic intermediaries to foreign intermediaries. In
relation to the latter, it is important that foreign regulators follow the lead of the
domestic regulator and ensure that foreign lending into an economy adheres
to the principles laid out by the domestic regulator; in principle, this type of
international coordination should be more effective under the Basel III set of
international rules. At the European level, the new Single Supervisory Mechanism
(SSM) should directly ensure that all Eurozone banks follow the same rule book,
including any prescribed restrictions on geographical patterns in lending.
In relation to emerging markets, given the implementation difficulties
facing macroprudential interventions, there has also been renewed interest in
the potential for capital flow management tools as a device to limit excessive
debt accumulation. However, capital controls also face their own types of
implementation problems, so that it is not obvious that capital controls can be
effectively deployed across a broad range of circumstances.