Macroprudential policy: Economic rationale and optimal tools

Giovanni Favara, Lev Ratnovski 06 August 2012

a

A

The purpose of macroprudential policy is to reduce ‘systemic risk’. While hard to define formally, systemic risk is understood as 'the risk of developments that threaten the stability of the financial system as a whole and consequently the broader economy” (Bernanke, 2009). The notion is meant to include the types of financial imbalances that led to the 2007-2008 bust.

a

A

Topics:  Financial markets

Tags:  systemic risk, macroprudential regulation, Macroprudential policy

A new eReport: Excessive risk-taking by banks

Richard Baldwin 30 March 2012

a

A

For many, the global crisis was caused by the interlinked fragilities that arose in the banking and financial sectors; these themselves were created by mindless deregulation and permissive monetary policy. By the late 2000s, the system was so precarious that shocks from many directions could have triggered the economic conflagration we witnessed.

a

A

Topics:  Global crisis Global economy Microeconomic regulation

Tags:  risk-taking, cross-border banking, macroprudential regulation

On the tradeoff between growth and stability: The role of financial markets

Alexander Popov, Frank Smets 03 November 2011

a

A

In the two decades leading to the Great Recession, academics had mostly converged on Schumpeter’s view that well-developed financial systems play a crucial role in stimulating economic growth. A host of academic papers had concluded that deeper domestic financial markets improve economic efficiency, lead to a better allocation of productive capital, and increase long-term economic growth (see Levine 2005 for a recent review).

a

A

Topics:  Financial markets

Tags:  growth, volatility, Finance, macroprudential regulation

The Dodd-Frank Act, systemic risk and capital requirements

Viral Acharya, Matthew Richardson 25 October 2011

a

A

The economic theory of regulation is clear. Governments should regulate where there is a market failure. It is a positive outcome from the Dodd-Frank legislation that the Act’s primary focus is on the market failure – namely systemic risk – of the recent financial crisis. The negative externality associated with such risk implies that private markets cannot efficiently solve the problem, thus requiring government intervention.

a

A

Topics:  Financial markets International finance

Tags:  capital requirements, Dodd-Frank Act, macroprudential regulation

Destabilising market forces and the structure of banks going forward

Arnoud Boot 25 October 2011

a

A

The financial services sector has gone through unprecedented turmoil in the last few years. We see fundamental forces that have affected the stability of financial institutions. In particular, information technology has led to an enormous proliferation of financial markets, but also opened up the banks’ balance sheets by enhancing the marketability of their assets. As a matter of fact, a fundamental feature of recent financial innovations – securitisation, for example – is that they are often aimed at augmenting marketability.

a

A

Topics:  Financial markets International finance

Tags:  complexity, Too big to fail, systemic risk, macroprudential regulation