This paper serves as a background paper to “Key Aspects of Macroprudential Policy” (the “Policy Paper”), which aims to strengthen the basis for practical guidance on the design and implementation of macroprudential policies. As member countries undertake reform in this critical area, they will need to determine both the scope and nature of the legal and institutional changes necessary to provide a framework that can effectively support macroprudential policies. It is now generally accepted that the global financial crisis was partly caused, or at least exacerbated by, weaknesses in financial sector policy frameworks. As is discussed in the Policy Paper, the main problem is that financial sector policies have traditionally focused on the soundness of individual financial institutions, markets, or market infrastructure rather than the stability of the financial system as a whole. Since financial sector legislation was designed on the basis of this policy approach, many jurisdictions are now exploring how existing financial sector legislation should be modified to allow for implementation of macroprudential policy In this context, this paper seeks to provide guidance to members on the key legal issues that will need to be addressed when designing frameworks to support macroprudential policies. The paper draws on the IMF’s experience in advising countries on legal frameworks for macroprudential policy, micro-prudential policy, and central banking. More generally, the paper takes into account a review of financial sector legislation—including macroprudential legislation—of a broad group of countries.6 It should be emphasized that this paper does not recommend a “one-size-fits-all approach”. The approach that members take when designing a legal and institutional framework will vary, depending on—among other things—deeply rooted legal (including constitutional) traditions and institutional preferences.

Moreover, the paper recognizes that macroprudential policy is still evolving and that the supporting legal framework may also need to evolve. Accordingly, the purpose of the paper is not to prescribe a particular model but to analyze the relevant legal issues and to serve as a basis for further study. 2 This paper was prepared, under the supervision of Sean Hagan, by a Legal Department team comprising, Barend Jansen, Wouter Bossu, Atilla Arda, Dinah Knight, Mario Tamez, Olya Kroytor, Francois Gianviti (external expert) and Robert Hockett (external expert). 3Key Aspects of Macroprudential Policy. This paper focuses on issues associated with the design of the domestic legal framework and does not discuss issues of cross-border coordination in detail. 5 See the Policy Paper (paragraph 2). 6 For purposes of this paper, staff has reviewed financial sector legislation and domestic constitutions for 25 member countries, each of which has at least one financial sector authority (e.g., a central bank, micro-prudential supervisor, council or committee; or government ministry) that has a financial stability objective. 7 Other factors that are likely to influence member countries when designing legal and institutional frameworks for macroprudential policies include the structure of the financial system and economy.