Macroprudential policy framework

Bank of Mongolia has been effectively implementing macroprudential policies aimed at mitigating systemic risks and safeguarding financial stability since 2019. Nevertheless, certain challenges remain to be addressed in terms of the institutional framework, legal environment, and policy instruments to further strengthen the macroprudential policy framework and enhance its effectiveness.

The Law on the Central Bank (Bank of Mongolia) provides for ensuring the stability of financial markets and the banking system as a subordinate objective pursued within the scope of the Bank of Mongolia’s primary objective. Furthermore, the law does not clearly distinguish between monetary and macroprudential policy instruments, creating ambiguity specifically between their purposes, conditions for their application, and the authority to calibrate these instruments in response to changes in systemic risk. In addition, decisions on both monetary and macroprudential policies are made by a single committee, the Monetary Policy Committee. While this arrangement facilitates policy coordination, it also creates a risk that one policy objective may take precedence over the other, potentially blurring the distinction between decision-making responsibilities and accountability.

The Bank of Mongolia regulates the banking sector, while the Financial Regulatory Commission oversees non-bank financial sectors. This division of responsibilities creates challenges in managing similar risks consistently across the financial system. In particular, insufficient policy coordination between regulatory authorities may lead to financial activities shifting from the banking sector, where macroprudential measures are applied, to other financial sectors which are subject to relatively less stringent regulatory requirements. This could undermine the effectiveness of macroprudential policies and create opportunities for regulatory arbitrage. Although the Financial Stability Council serves as the main platform for cross-sectoral policy coordination, its authority to harmonize policy measures among regulatory authorities and ensure their implementation remains insufficiently defined.

In recent years, although asset dollarization has stabilized at around 18 percent, liability dollarization remains at approximately 36 percent, potentially posing risks to financial stability in the event of sharp exchange rate movements or external shocks. Furthermore, banks’ increasing reliance on funding raised from international markets through bonds and loans has heightened the banking sector’s vulnerability to changes in external financial conditions and exchange rates, thereby increasing foreign currency liquidity and refinancing risks.

As a small open economy that is highly dependent on commodity exports and foreign capital flows, Mongolia is vulnerable to fluctuations in credit and financial cycles driven by external shocks and changes in financial conditions. During favorable external conditions, capital inflows and credit growth may accelerate, leading to the accumulation of financial risks. Conversely, negative shocks may tighten financing conditions and trigger a sharp contraction in credit, thereby amplifying an economic downturn. Accordingly, there is a need to further expand the macroprudential policy toolkit, in line with the best international practices, to mitigate cyclical risks within the financial system.

The Bank of Mongolia’s Medium-Term Strategy (2026–2030) sets out measures to strengthen financial stability and data-driven supervision by improving the institutional framework for macroprudential policy and developing policy instruments tailored to different types and characteristics of risk. These measures include:

• Strengthening the institutional framework for macroprudential policy and developing policy instruments tailored to different types and characteristics of risk.
• Taking measures to address regulatory arbitrage between the banking and non-bank financial sectors.
• Enhancing systemic risk assessment and data-driven analytical frameworks.

• To strengthen the institutional framework for macroprudential policy, the Bank of Mongolia will pursue amendments to the Law on the Central Bank (Bank of Mongolia) and other relevant legislation. In this context, the revised draft of the Law on the Central Bank (Bank of Mongolia) will incorporate provisions for the establishment of an independent committee within the Bank of Mongolia, separate from the Monetary Policy Committee, to address systemic risks.
• Amendments to the Law on the Central Bank (Bank of Mongolia) and other relevant legislation will be pursued to strengthen policy coordination among regulatory authorities within the framework of the Financial Stability Council and ensure consistent application of the debt-service-to-income (DSTI) limit on consumer loans across banks, non-bank financial institutions, and different credit products.
• The countercyclical capital buffer (CCyB), one of the key macroprudential policy instruments, will be studied and introduced in phases.
• Stress testing, early warning systems, models, and analytical methodologies for assessing systemic risks will be improved in line with international best practices.

Implementation of these measures is expected to strengthen the legal and institutional framework for macroprudential policies, support ensuring both price and financial stability. The establishment of a dedicated macroprudential committee will clarify the respective responsibilities and accountability of monetary and macroprudential policy, ensuring that decisions are more firmly grounded in systemic risk assessments and are more predictable. The consistent application of debt-service-to-income limits across all financial sectors and credit products will help eliminate regulatory arbitrage and reduce the transmission of risks associated with multiple borrowing across sectors. Furthermore, the introduction of a countercyclical capital buffer (CCyB) will enable banks to build additional capital buffers during periods of strong credit growth and release these buffers during adverse shocks, thereby helping to prevent an abrupt contraction in lending. Finally, improvements in stress testing and early warning systems will facilitate the early identification of systemic risks and enable timely implementation of appropriate policy measures.