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Macroprudential Policy: A Summary
The 2007 global financial crisis brought sharply into focus the need for
macroprudential policy as a means of controlling systemic financial stability.
This has become a focal point for policy-makers and numerous central
banks, including the Bank of Canada, but it has its drawbacks, particularly
here in Canada.
As a counterbalance to microprudential policy, the idea of a macroprudential
outlook reaches beyond the notion that as long as every banking institution
is healthy, financial stability is assured. Macroprudential policy recognizes
that all those financial institutions are linked, and that stability at the
individual level may translate to fragility and uncertainty at the macro level.
There are two approaches to macroprudential policy, and both come with
downsides. One approach examines the network factor, in which banks are
linked through their inter-connected financial transactions. A domino effect
can thus be created; when one bank defaults, it causes a chain reaction
down the line, creating instability in other banks in the network. The extent
of this contagion of instability can be clearly observed through this model;
unfortunately, it requires the use of detailed information typically available
only to a limited circle of bank supervisors