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Macroprudential Policy: Silver Bullet or Refighting the Last War?

Jul 08, 2015
Publisher: Milken Institute

In the wake of the global financial crisis, policymakers, investors, and lenders analyzed the lead-up to the meltdown to see what changes could prevent another near-collapse. The result: a new focus on how macroprudential policy can reduce systemic risk. In this report we explore the emerging macroprudential policy discussion and the implications for broader monetary policy.

Prior to the crisis, financial “fault lines” worsened to extremes amid the complacency of financial institutions and regulators, who were overconfident in their ability to manage risk without regard for broader systemic impact. With hindsight, it is evident that seemingly unrelated risks were in fact intertwined and cumulatively posed serious threats to the global financial system. The crisis highlighted the need for macroprudential supervision, which takes a wider, systemic view. Such oversight is concerned with the stability of entire industries and the health of linkages within the financial sector that can shatter, or strengthen, the economy. It is emerging as a crucial tool to address a glaring policy gap.