Macroprudential policy

The term macroprudential regulation characterizes the approach to financial regulation aimed to mitigate the risk of the financial system as a whole (or "systemic risk"). In the aftermath of the late-2000s financial crisis, there is a growing consensus among policymakers and economic researchers about the need to re-orient the regulatory framework towards a macroprudential perspective.

As documented by Clement (2010), the term "macroprudential" was first used in the late 1970s in unpublished documents of the Cooke Committee (the precursor of the Basel Committee on Banking Supervision) and the Bank of England. But only in the early 2000s—after two decades of recurrent financial crises in industrial and, most often, emerging market countries—did the macroprudential approach to the regulatory and supervisory framework become increasingly promoted, especially by authorities of the Bank for International Settlements. A wider agreement on its relevance has been reached as a result of the late-2000s financial crisis.

The main goal of macroprudential regulation is to reduce the risk and the macroeconomic costs of financial instability. It is recognized as a necessary ingredient to fill the gap between macroeconomic policy and the traditional microprudential regulation of financial institutions (Bank of England, 2009).

Following Borio (2003), the macro- and microprudential perspectives differ in terms of their objectives and understanding on the nature of risk. Traditional microprudential regulation seeks to enhance the safety and soundness of individual financial institutions, as opposed to the macroprudential view which focuses on welfare of the financial system as a whole. Further, risk is taken as exogenous under the microprudential perspective, in the sense of assuming that any potential shock triggering a financial crisis has its origin beyond the behavior of the financial system. The macroprudential approach, on the other hand, recognizes that risk factors may configure endogenously, i.e., as a systemic phenomenon. In line with this reasoning, macroprudential policy addresses the interconnectedness of individual financial institutions and markets, as well as their common exposure to economic risk factors. It also focuses on the procyclical behavior of the financial system in the effort to foster its stability.

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