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.
Macroprudential policy: Economic rationale and optimal tools
Giovanni Favara, Lev Ratnovski, 6 August 2012
A new eReport: Excessive risk-taking by banks
Richard Baldwin, 30 March 2012
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.
On the tradeoff between growth and stability: The role of financial markets
Alexander Popov, Frank Smets, 3 November 2011
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.
The Dodd-Frank Act, systemic risk and capital requirements
Viral Acharya, Matthew Richardson, 25 October 2011
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.
Destabilising market forces and the structure of banks going forward
Arnoud Boot, 25 October 2011
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.
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