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What is microprudential regulation?

Microprudential regulation

Financial regulation at a firm level to make sure individual financial institutions are resistant to shock.

Key takeaways

  • Microprudential regulation is firm-level financial regulation focusing on individual banking institutions' stability and customer protection rather than the overall economy.

  • The debate between microprudential and macroprudential regulation intensified following the 2007-2008 financial crisis regarding their respective benefits for financial stability.

  • Critics argue microprudential regulation neglects systemic implications, such as market-wide impacts when everyone simultaneously buys or sells the same assets.

  • Many economic experts believe a balanced combination of microprudential and macroprudential regulation is required for maintaining a healthy financial system.

  • Macroprudential regulation differs by taking a broader viewpoint that focuses on the financial system as a whole rather than individual institutions.

Where have you heard about microprudential regulation?

The benefits of microprudential versus macroprudential regulation have been hotly debated following the financial crisis of 2007-2008.

What you need to know about microprudential regulation.

Microprudential regulation focuses on the stability of individual banking institutions and protection of their customers rather than the economy as a whole. It considers the health of individual institutions to be critical for financial stability and focuses on the resilience of these institutions and their response to external risks.

The microprudential regulatory approach has been criticised for neglecting the systemic implications of behaviour which can result in financial crises. For example, the impact on the market of everyone buying or selling particular assets at the same time. Many economic experts believe a balance of microprudential and macroprudential regulation is required for a healthy financial system.

Find out more about microprudential regulation.

Macroprudential regulation takes an alternative viewpoint that focuses on the financial system as a whole. Find out more about the differences in our guide to macroprudential regulation.