One of China’s senior-most central bank officials says the macro prudential assessment (MPA) system established in the wake of the Great Financial Crisis will prove an effective means of preventing risk and preserving financial stability.
47 year-old Yin Yong, the youngest of the People’s Bank of China’s five deputy governors, said that China’s macro prudential assessment system was distinct from other banking regulatory systems that are “limited and fragmented.”
“China’s MPA framework is designed to prevent systemic risks,” said Yin at the annual conference held by financial news publication Caixin last Thursday. “[It is] set to enhance the stability of the financial system and control excess prosperity.”
President Xi Jinping said last month that the MPA framework was one of the “two pillars” of China’s central banking system alongside conventional monetary policy tools, while earlier this year Hu Shuli, Caixin’s chief editor, hailed the use of the MPA system as marking a “turning point” for Chinese central banking.
According to Hu the addition of macro prudential policy to conventional monetary policy as part of PBOC’s tool kit is a critical reform that gives the central bank greater flexibility and discretion when it comes to regulation of the financial sector.
While monetary policy will still primarily be used to manage aggregate demand and the Chinese macroeconomy with a view to stabilising growth and inflation, macro prudential policy can be directly applied to the financial system itself, in order to control excess deleveraging or pro-cyclical credit expansion, with the goal of maintaining financial stability.
The MPA system was also mentioned at the inaugural meeting of China’s Financial Stability and Development Committee last week, although specific details as to its application and deployment have yet to be revealed.
“The coordination between macro prudential assessment, monetary and fiscal policies is still being explored,” said Yin.
The MPA has three main functions, chief amongst them the regulation of the banking sector, and the setting of reserve requirements based upon the governance and risk profiles of individual lenders.
The MPA also addresses cross-border capital flows as well as mortgage and property credit policies.