Institutional and operational aspects of macroprudential policy in central and eastern European EU member states

Challenges to macroprudential policy are mainly of a universal nature and encompass, in particular, difficulties in the pre-emptive identification of looming imbalances; interactions with the political cycle; asymmetry in the perception of costs and benefits of using macroprudential instruments; and inaction bias. However, in open central and Eastern Europe (CEE) economies that are hosts to foreign banks, some specific features should be taken into account when designing the architecture of the macroprudential institutional framework. This note – drawing on the experience of Poland in this field – analyses important characteristics of effective macroprudential policy, with particular attention paid to the institutional conditions of Poland and other small, open and integrated EU economies that are not members of the EU banking union or the euro area. The author finds that, in some circumstances, CEE countries hosting large foreign banks may need recourse to instruments that are non-standard and non-harmonised in EU law. The note concludes that entrusting macroprudential policy to a committee with the leading role of the central bank could prove to be the most effective option, as it enables the smooth coordination of financial safety net institutions and facilitates the use of some non-harmonised or unorthodox instruments. Such an institutional arrangement provides for multifaceted know-how and superior capability compared with a single institution. A collegial body employed with soft powers also accommodates the phenomenon of fiscal dominance, as the inclusion of government representatives reduces the risk of divergent actions, shares accountability and allows for some scrutiny over the use of fiscal instruments.