Hutchins Center Working Paper #5 6 January 2020 Financial Stability Governance and Basel III Macroprudential Capital Buffers* Rochelle M. Edge J. Nellie Liang First draft: August 4, 2019 This draft: January 16, 2020 Abstract We evaluate how a country’s governance structure for macroprudential policy affects its implementation of Basel III macroprudential capital buffers. We find that the probabilities of using the countercyclical capital buffer (CCyB) are higher in countries that have financial stability committees (FSCs) with stronger governance mechanisms and fewer agencies, which reduces coordination problems. These higher probabilities are more sensitive to credit growth, consistent with the CCyB being used to mitigate systemic risk. A country’s probability of using the CCyB is even higher when the FSC or ministry of finance has direct authority to set the CCyB, perhaps because setting the CCyB involves establishing a new macro-financial analytical process to regularly assess systemic risks and allows these new entities to influence the process. These results are consistent with elected officials creating the FSCs with the strongest governance and fewer agencies for functional delegation reasons, but most FSCs are created for symbolic political reasons. * Rochelle M. Edge, Federal Reserve Board,
[email protected]; J. Nellie Liang, Brookings Institution,
[email protected]. This paper updates an earlier paper “Financial Stability Committees and the Countercyclical Capital Buffer” prepared for the Deutsche Bundesbank, Sveriges Riksbank, and De Nederlandsche Bank Fifth Annual Macroprudential Conference, available at: https://www.bundesbank.de/resource/blob/804686/2bf53d54a90518a3ba524daa5098b565/mL/2019-06-21-eltville-session3- edge-liang-data.pdf. We are grateful for helpful comments from Luca Guerrieri, Michael Kiley, Don Kohn, Andreas Lehnert, Erland Nier, Jean-Charles Rochet, Martin Taylor, and David Wessel.