Understanding Systemic Risk in Global Financial Markets

CHAPTER 6Macroprudential versus Microprudential Oversight

INTRODUCTION

This chapter will focus on two categories of regulatory supervision that are important to understand in the context of systemic risk identification and mitigation. Over the past century, financial regulators have implemented many types of requirements that financial institutions, primarily banks, must adhere to, such as minimum capital ratios, loan underwriting standards, and stock margin rules, to name a few. Historically, such tools were concerned primarily with managing risk at the individual institution level, known as microprudential supervision. However, a key lesson from the Credit Crisis was the need to put in place more robust macroprudential policies, tools, and frameworks to ensure financial stability in a marketplace that has grown significantly more complex and interconnected than in the past. These frameworks should include new and better tools to allow for early warning and intervention to help reduce the probability of systemic events and contain their impact on the economy.

After reading this chapter you will be able to:

• Define the term microprudential supervision.
• Define the term macroprudential supervision.
• Understand the key differences between both categories of supervision.
• Provide examples of the various regulatory tools that have existed for decades.
• Explain the four stages that a sound macroprudential policy strategy should follow.
• Provide examples of the capital, liquidity, and ...