Macroprudential policy and strategy

Macroprudential Policy

Macroprudential policy is aimed at ensuring the stability of the financial system. Traditional microprudential policy has focused on protecting the soundness and stability of individual financial institutions, particularly commercial banks, as well as safeguarding the interests of depositors. However, during the global financial crisis, microprudential policy tools were widely recognized as having limitations in monitoring risks that could arise at a systemic level. As a result, following the crisis, many countries have been expanding their toolkit to explore more systematic approaches to financial regulation and supervision. This comprehensive approach is referred to as macroprudential policy.

The primary objective of macroprudential policy is to ensure financial stability by limiting the accumulation of systemic risks, preventing potential vulnerabilities from evolving into risks, enhancing preparedness for systemic risks once they become apparent, and to withstand such risks with minimal losses.

Macroprudential Policy Strategy

In January 2018, amendments to the Central Bank Law were adopted, thereby establishing the legal framework for the Bank of Mongolia to implement macroprudential policy. Drawing on international best practices and recommendations of international organizations, the “Strategy for Establishing a Macroprudential Policy Framework in Mongolia” was approved. The strategy defines the objectives of macroprudential policy to be implemented in Mongolia, policy instruments, institutional arrangements, and general principles for policy formulation and implementation.

The strategy document states that the objectives of macroprudential policy are:

1. to ensure financial stability,
2. to strengthen the resilience of the financial system,
3. to prevent systemic risks.

In defining the principles for implementing macroprudential policy, it is noted that macroprudential policy is an independent policy framework that neither substitutes for other macroeconomic policies nor overlaps with microprudential policy.