Risk management through the lens of macroprudential policy (original) (raw)
Related papers
Macroprudential Policies in Managing Systemic Risk: A review
The great financial crisis has emphasized the importance of establishing macroprudential architectures to address problems of financial stability. Macroprudential authorities monitor the entire financial system and identify risks and vulnerabilities unlike micro prudential policies that do not incorporate endogenous risk. The adoption of macroprudential tools to mitigate systemic risk has become the norm in many financial markets. This paper covers a wide range of literature review of macroprudential policies from all around the world. Ultimately, it is evident that macroprudential regulation enables long term financial stability of an entire financial system not just an individual entity. In addition macroprudential policy instruments should be paired with financial stability objectives to be able to address the likelihood of systemic risk which is not factored in many institutions.
The Next Decade of Macroprudential Policy
Bank of Greece Financial Stability Review, 2022
This paper presents an overview of key proposals formulated by the European Systemic Risk Board (ESRB), the European Banking Authority (EBA) and the European Central Bank (ECB) in the context of the review of the macroprudential policy framework of the European Union (EU), aimed at improving its operation and efficiency over the medium term.
Financial crisis. Implementation of macro- and micro-prudential regulation
Review of Applied Socio Economic Research, 2013
A. The financial crisis occurs as a result of a disorder in the financial market. It implies serious problems of unfavorable selection and moral risk, making the financial markets unable to direct efficiently the funding from depositors toward individuals and businesses with potential of productive investments. When the financial markets are not able to function efficiently the economic activity visibly decreases. If the crises repeat periodically, it is a challenge of policy makers to review and take regulatory measures. They should not just watch the situation, but also react according to the character and the color of the actual crisis. Exchange of thoughts in recent times go through criticism of existing implemented models (almost unpredictable and accompanied with enormous costs to the population) to stabilization policies that hurt the expected profit margins and the control of pressures over prices. The reason we try to prevent financial crises is that the social costs are invariably high and exceed the private cost to private financial institutions. We regulate to internalize these externalities in the behavior of the financial institutions. One of the most important regulatory tools used is the request for capital adequacy. B. The actual approach to capital adequacy is micro-prudential. Micro-prudential regulation deals with a certain bank reaction toward exogenous risks. They do not include endogenous risks and this neglects systemic implications of common behavior. Micro-prudential regulation consisting of such measures as the certification of those who work in the financial sector, regulations of what assets can be held and by whom, how the instruments are listed, traded, sold or reported, assets valuation and riskiness measures, deals with price stability and the protection of the clients of various institutions. Regulators should be careful when implementing micro-prudential regulations, especially those that respond to market value and risk measurements. C. It happens randomly that banks and borrowers underestimate risks in boom periods and overestimate them in crash periods. The essential problem remains risk perception from 'low" to "very high". Macro-prudential regulation consists on narrowing this gap, forcing the banks to undertake higher risks during boom periods (i.e. to invest more capital than they evaluate as necessary), so they can support crediting during crises period by letting this capital go. Systemic stability and homogeneity of the financial system is another characteristic of the macro-prudential regulation. Common behavior, when all sell or buy at the same time, is one of the reasons the system crashes. Always the market players intend to be heterogenic, however, as we all know, as a result of a number of factors, regulations and other reasons, market players tend to act homogeneously. In this context, systemic risk is endogenous and macro-prudential regulations have to identify these endogenous processes and reinstate heterogenic behavior. Albania As a conclusion, in order to prevent these crises, well defined micro-and macro-prudential need to be established. They also help on monetary policies.
Macroprudential Policy in Post-Crisis Banking Regulation
World Economy and International Relations, 2017
In the wake of the recent financial crisis, the term "macroprudential" has become a true buzzword. A core element of international efforts to strengthen the financial system is to enhance the macroprudential orientation of regulatory and supervisory frameworks. Yet the term was little used before the crisis, and its meaning remains obscure. This special feature traces the term's origins to the late 1970s, in the context of work on international bank lending carried out under the aegis of the Euro-currency Standing Committee at the BIS. It then describes its changing fortunes until its recent rise to prominence.
The Instruments of Macro-Prudential Policy
The recent global crisis revealed a role for macro-prudential policy or measures to mitigate systemic risk. In Ireland, the high costs of the recent banking crisis showed that forward-looking risk assessments and pre-emptive policy action are important to ensure that the future probability of such a crisis reoccurring is reduced. Macro-prudential policies primarily aim to complement regulatory oversight of individual firms and build resilience, initially in the banking sector. A secondary (albeit more ambitious) goal is to dampen the volatility of the financial cycle and reduce the potential for destabilising imbalances within the financial system to accumulate. This paper focuses on the banking sector and the various measures available to macro-prudential authorities to mitigate this risk.
ECMI Commentary, 2009
This is not the first international banking crisis the world has seen. The previous ones occurred without credit default swaps, special investment vehicles, or even credit ratings. If crises keep repeating themselves, it seems reasonable to argue that policy makers need to carefully consider what they are doing and not just "double up" by superficially reacting to the specific features of today's crisis. While we cannot hope to prevent crises, we can perhaps make them fewer and milder by adopting and implementing better regulation-in particular, more macro-prudential regulation.
Journal of Banking & Finance, 2012
This paper analyses various issues that need to be tackled when promoting financial stability, reviewing the progress made in certain key areas and the remaining challenges. It explores the measurement of systemic risk and of individual institutions' contribution to it. It discusses aspects of macroprudential frameworks, including how the countercyclical capital buffer envisaged in Basel III takes into account the properties of the financial cycle and the strengths and weaknesses of macro-stress tests. It analyses some of the challenges of how best to monitor financial systems and the broader economy in order to detect signs of vulnerability that might lead to future bouts of financial instability and of how to set prudential policy accordingly. And it discusses the evolution of capital adequacy standards and the new emphasis on liquidity standards in international regulation.
Central Bank Involvement in Macro-Prudential Oversight
SSRN Electronic Journal, 2012
This working paper addresses the institutional arrangements for the performance of macro-prudential oversight of the financial system in the European Union with focus on the functions of the central banks. The first section of the paper outlines the evolution of the EU's supervisory arrangements which led to the establishment of the European Systemic Risk Board (ESRB) as the body responsible for EU macro-prudential oversight. This section also describes the ESRB's institutional links to the European System of Central Banks (ESCB), which comprises the European Central Bank (ECB) and the national central banks (NCBs) of the EU Member States. In the second section, the paper describes the supporting role played by the ECB and the NCBs in the performance of the ESRB's functions. Such support is provided at each stage of the macro-prudential oversight process, which comprises: (i) risk surveillance by the collection of market data; (ii) risk identification and evaluation by analytical reviews of the information collected; and (iii) risk mitigation by actions such as issuing risk warnings and recommendations. In the third section, the paper's analysis of the institutional arrangements at the EU level is complemented by a review of the main current models for cooperation at the national level between national macro-prudential authorities and their respective NCBs. In conclusion, the paper points to the need to establish robust legal safeguards to ensure the effectiveness of central bank involvement in the performance of macro-prudential oversight of the financial system, including establishing reliable data collection channels and respect for central bank independence.