Macroprudential policy is a concept in the banking regulation and supervision literature which has to do with defining conditions which can result in financial instability and how to prevent such outcomes through public policy.
Contents |
Macroprudential is a term originating some decades ago in banking regulation circles referring to banking practices that may undermine the stability of the financial system and effective regulation to prevent it.[1] The concept has gained wide currency in the wake of the major financial crisis that hit the world in 2007. Macroprudential is an antonym to microprudential. The latter concept relates to the regulation and supervision to ensure the health and soundness of individual banking institutions.
The term macroprudential is seen to have two complementary dimensions. One, refers to the behaviour of individual banks which serves to increase systemic risk for the banking sector as a whole at any given point in time. The other dimension focuses on the interaction of bank lending on risks in the wider economy over time. A pro-cyclical influence results in a boom which is then followed by a bust, which can be enoromously costly for the economy and tax payers.
The main approach being developed seems to rely on upgrading existing capital adequacy requirements, in order to have financial firms pay up front for the social insurance extended to distressed financial firms.[2] A new liquidity requirement is also being developed.[3] While the modalities have not yet been defined, such instruments are aimed at giving support to monetary policy instruments, notably the interest rate, to restrain credit growth such that an unsustainable asset bubble, followed by a crash, does not develop. Also, efforts to identify endogenous risks could potentially improve stress testing of bank balance sheets.[4]