(and failing to consider alternative payments)—thus raising their vulnerability at every point in their repayment period. When a huge proportion of the population does the same thing, the overall system is more vulnerable. Although this area has received some treatment in Financial Stability Reports (including the Bank of Canada’s Financial System Review), there has been little written on it from a theoretical and macroprudential policy point of view. Governance In both monetary policy and regulatory areas, there has been significant emphasis put on governance for achieving desired results. Governance issues can be generally divided into two: a framework for achieving a desired objective, and specific governance practices (legitimacy, relationships, structure of the decision-making body, integrity, independence, transparency, accountability, “will to act,” and human resource management) to aid in the effectiveness of the framework. A generic framework for a macroprudential authority is set out below in Figure 1. A legislature grants powers to an authority which allows it to carry out certain activities and use a number of policy instruments to achieve certain goals which will allow it to meet its overall objective. If the overall objective is to avoid significant financial instability, then the version of reducing systemic risk or mitigating negative externalities would be dampening procyclicality and reducing the potential effects of contagion. The key policy instruments would be the macroprudential instruments discussed above, but they could also include advice on policies to governments, and warnings to private sector firms and households about underappreciated risks. To exercise these instruments, the macroprudential authority will need to undertake data collection (both of important aggregate data and important subaggregates), engage in surveillance of what is happening in the financial system, undertake analysis and stress testing of the system, and assess the degree of risk present in the system. One of the key questions is whether the macroprudential authority should itself be able to determine the settings of the macroprudential instruments or just be able to recommend
(and failing to consider alternative payments)—thus raising their vulnerability at every point in their repayment period. When a huge proportion of the population does the same thing, the overall system is more vulnerable. Although this area has received some treatment in Financial Stability Reports (including the Bank of Canada’s Financial System Review), there has been little written on it from a theoretical and macroprudential policy point of view. Governance In both monetary policy and regulatory areas, there has been significant emphasis put on governance for achieving desired results. Governance issues can be generally divided into two: a framework for achieving a desired objective, and specific governance practices (legitimacy, relationships, structure of the decision-making body, integrity, independence, transparency, accountability, “will to act,” and human resource management) to aid in the effectiveness of the framework. A generic framework for a macroprudential authority is set out below in Figure 1. A legislature grants powers to an authority which allows it to carry out certain activities and use a number of policy instruments to achieve certain goals which will allow it to meet its overall objective. If the overall objective is to avoid significant financial instability, then the version of reducing systemic risk or mitigating negative externalities would be dampening procyclicality and reducing the potential effects of contagion. The key policy instruments would be the macroprudential instruments discussed above, but they could also include advice on policies to governments, and warnings to private sector firms and households about underappreciated risks. To exercise these instruments, the macroprudential authority will need to undertake data collection (both of important aggregate data and important subaggregates), engage in surveillance of what is happening in the financial system, undertake analysis and stress testing of the system, and assess the degree of risk present in the system. One of the key questions is whether the macroprudential authority should itself be able to determine the settings of the macroprudential instruments or just be able to recommend