Stricter microprudential supervision versus macroprudential supervision

Author:Larry D Wall
Position:Federal Reserve Bank of Atlanta, Atlanta, Georgia, USA
Pages:354-368
SUMMARY

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 ... (see full summary)

 
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Stricter microprudential
supervision versus
macroprudential supervision
Larry D. Wall
Center for Financial Innovation and Stability,
Federal Reserve Bank of Atlanta, Atlanta, Georgia, USA
Abstract
Purpose The purpose of this paper is to develop an explicitly macroprudential supervisory
framework designed to identify threats to nancial stability, use existing mechanisms to reduce the risk
of these threats and to provide information to the authorities to more efciently 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 nancial markets that have the potential to undermine nancial stability. It concludes with a
discussion of how the surveillance results may be used to enhance nancial stability.
Findings – The current supervisory focus on microprudential supervision of systemically important
institutions is insufcient; an explicitly macroprudential focus is required.
Research limitations/implications – Although this paper’s conceptual framework is applicable to
all advanced nancial systems, the discussion of specic regulatory structures focuses on the USA.
Practical implications – An explicit supervisory focus on the threats posed by major nancial
markets is feasible and desirable.
Social implications – The probability of a nancial crisis and the economic damage caused by a
crisis can be signicantly reduced by redirecting some regulatory efforts toward in-depth analysis of
major nancial markets.
Originality/value The paper emphasizes that macroprudential supervision must include both
quantitative and detailed analysis of the qualitative aspects of key markets.
Keywords Macroprudential supervision, Major nancial markets, Microprudential supervision
Paper type Technical paper
Prior to the crisis, the primary means of maintaining nancial system stability in the
USA was a set of policies designed to prevent bank runs. These policies included the
provision of the federal safety net to commercial banks and the imposition of prudential
supervision to mitigate the moral hazard associated with the safety net[1]. Yet the
nancial crisis in the USA that started in 2007 showed that maintaining nancial
stability takes more than protecting commercial banks. The high-risk mortgages that
led to the crisis were often underwritten by mortgage banks, securitized by investment
The author thanks Ed Kane and participants at a conference on “Nonbank Financial Firms and
Financial Stability” at the Federal Reserve Bank of Atlanta for helpful comments. The views
expressed are those of the author and are not necessarily those of the Federal Reserve Bank of
Atlanta or the Federal Reserve System. The only funding provided for this research project came
from the Federal Reserve Bank of Atlanta.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
JFRC
23,4
354
Journalof Financial Regulation
andCompliance
Vol.23 No. 4, 2015
pp.354-368
©Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-03-2015-0013

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