Macroprudential policy - Topic F

Question 1

Macroprudential policy + example?

Answer 1

Financial policies aimed at ensuring the stability of the financial system as a whole to prevent disruptions in credit or other vital financial services that are necessary for economic growth

e.g. higher capital charge applied to Global Systemically Important Banks (G-SIBs) > less likelihood for big banks such as JP Morgan Chase & Co to fail as they have this buffer to absorb losses

Question 2

Why is preventing financial crises socially desirable?

Answer 2

FCs have more social costs than private

Minimises the need for taxpayer-funded bailouts (which can have a LT -ve impact on public finances)

Helps maintain confidence in the FS (investors not afraid to invest, individuals not afraid to save)

Question 3

What’s the difference between micro and macroprudential policies?

Answer 3

Micro = focused on safety of individual institutions rather than the whole FS (preventing idiosyncratic risks)

Question 4

How did the GFC prove microprudential policies to be ineffective?

Answer 4

Failed to account for systemic risks and the interconnectedness of financial systems > risk was given room to spread, e.g. mortgage backed securities (MBS) crashed which affected the whole FS, exacerbating the impact

Assessment of risks were based on incomplete info > microprudential policies couldn’t accurately target foundational weaknesses that contributed to the crises

Question 5

What does macroprudential supervision focus on?

Answer 5

Capital adequacy (buffer to protect against losses) as well as liquidity