What is macroprudential regulation?
Macroprudential regulation is an approach to financial regulation, aiming to mitigate risk to the entire financial system and thus avoiding and reducing the macroeconomic costs of financial instability. The approach is used by central banks and regulators around the world.
Where have you heard about macroprudential regulation?
Macroprudential regulation was born after the late-2000s financial crisis as an attempt to restructure the regulatory framework. The term 'macroprudential' was first used in the late 1970s in unpublished documents by the Cooke Committee and the Bank of England.
What you need to know about macroprudential regulation.
Macroprudential regulation should not be confused with microprudential regulation, which aims to enhance the safety of individual financial institutions, rather than the entire financial system as a whole. In macroprudential regulation, various tools are used including introducing a cap on debt-to-income ratio, a cap on leverage (which limits asset growth by tying banks' assets to their equity) and capital requirement surcharges proportional to the size of maturity mismatch. Other tools include restricting lending on individuals and building buffers.