Stricter microprudential supervision versus macroprudential supervision

Abstract

Purpose – The purpose of this paper is to develop an explicitly macroprudential supervisory framework designed to identify threats to financial stability use existing mechanisms to reduce the risk of these threats and to provide information to the authorities to more efficiently mitigate any instability that does arise. Design/methodology/approach – This paper begins with an analysis of the limitations of microprudential regulation. It then develops a macroprudential surveillance framework focused on those financial markets that have the potential to undermine financial stability. It concludes with a discussion of how the surveillance results may be used to enhance financial stability. Findings – The current supervisory focus on microprudential supervision of systemically important institutions is insufficient; an explicitly macroprudential focus is required. Research limitations/implications – Although this paper’s conceptual framework is applicable to all advanced financial systems the discussion of specific regulatory structures focuses on the USA. Practical implications – An explicit supervisory focus on the threats posed by major financial markets is feasible and desirable. Social implications – The probability of a financial crisis and the economic damage caused by a crisis can be significantly reduced by redirecting some regulatory efforts toward in-depth analysis of major financial markets. Originality/value – The paper emphasizes that macroprudential supervision must include both quantitative and detailed analysis of the qualitative aspects of key markets.