The period of economic slowdown affectedbanking regulation on all standard approaches. Policymakers have now understoodthat financial guideline cannot be based simply on financial institutions`peril. As a result, systematic risk and macroprudential regulation have been themain emphasis on regulatory system.
The 2007-2008 financial disastercalled for an effective macroprudential policies and measures to alleviatesystematic risk. In US, the high costs of the crisis proved that progressiverisk assessment and effective policy action are required to ensure that the possibilityof such risk reoccurring is minimized.Resulting from the crisis,regulators have strived to understand its causes and how best to preventsimilar disturbances from happening in the future. Weighing in on this paper, Iprovide insight into managing systematic risk and how concentrations offinancial stability can somehow reflect to the need for accommodative monetarypolicy. For instance, since 2008 the US accommodative monetary policy hashelped to overhaul the balance sheets of households, nonfinancial firms, andfinancial sector.The need for a dynamic and stablefinancial system resistant to possible risks and disturbances is essentialafter the financial crisis in 2008. Financial stability through effectiveregulation and supervision is obligatory.
The crisis displayed that stabilityin price does not proved macroeconomic stability and as a result, financialstability through macroprudential policy must be in place. This is because, steadyfinancial institutions are a prerequisite for a sustainable economic growth.Prior to the crisis, regulatorsconcentrated on easy instruments such as market discipline and communication tosafeguard financial stability. Macro-financial ties were not taken intoconsideration and the transmission of danger across the financial system wereignored.
But this view changed after the global calamity which led to a hardpolicy measure to ease systematic risk. Since the crisis, several institutionssuch as the Financial Stability Oversight Council in the US have embarked oneffective macro-prudential policy and have activated macro-prudentialinstruments. Most of these instruments help to prevent the “procyclicality” ofthe financial system on the asset and liability sides.The aim of this paper is to presentthe various instruments of macroprudential policy as a measure to prevent systematicrisk. The structure of the paper is as follows. Section 2 briefly introducesthe concept of systematic risk and macroprudential policies.
The reason formacroprudential policies and the measurement of systematic risk. Section 3 lookedinto the financial crisis and presents range of instruments available to preventsystematic risk. Section 4 discussed challenges faced by US in facilitating asustainable macroprudential policies. It also explained who is responsible formacro-prudential policies in US; And proposed eight propositions on effectivemacro-prudential policies. Section 5 concludes.”The risk of a systematic crisisoccurring is called systematic risk”. The great depression shows an example ofsystematic risk.
Investors in 2008 saw the values of their investments changedrastically from the economic shock. The financial crisis affected assetclasses in different ways as riskier securities were sold off in large numbers,while simpler assets, such U.S. Treasury Bonds, became more valuable.Macroprudential policies are aimedto monitor and assess financial institutions variability. It refers to preservingthe whole inflexibility of the financial system through instruments of regulationand supervision.
For it to be effective and efficient, a strong and definedmacroprudential policies are needed to support the stability of the bankingsector. Central banks and other financial institutions required a well-definedpolicies and instruments to enforce responsibilities and activities inevitably.Such policies can be complimentary to micro-prudential supervision. In as muchas financial and monetary policy can facilitate financial constancy,macroprudential policies differ from it, simply in its instruments.
“Macroprudential” refers to amethod of financial regulation that relate conventional macroeconomic policyand traditional “micro-prudential” regulation of individual financial system(Elliott 2011). The goal of a regulator is to mitigate systematic risk thatcould affect the financial system. The policy could be either “structuralmacroprudential” policies which aim to sustain the system against pressuresthat are present to some degree, or “cyclical macroprudential” policies whichaim to revive financial instability that could affect the system over time.