What Are We Trying to Do? Framework Considerations on Systemic Financial Risk
Macro-prudential supervision aims to detect the emergence of systemic risk and identify remedial action before crisis . It must be applied in a highly complex and integrated financial system, in which micro-prudential banking supervision cannot provide stability. Former ECB President Jean-Claude Trichet identified the need “to integrate all relevant perspectives, including those of economists, supervisors, regulators, accountants, securitisation experts, rating experts, risk managers and many others, to take a holistic view on the system, its dynamics and its interlinkages.” A European Systemic Risk Board was established in 2010 to help achieve this. In its report on April 30, 2014, the Board suggested that its macro-prudential provisions provide a valuable toolkit to national authorities to protect their own financial systems, and that of the EU, but noted that the tools available were not yet optimally articulated. If one can succeed, strengthening systemic stability will remove undue pressures on monetary and fiscal policies to extend financial safety nets, allowing macroeconomic policies to focus on their primary objectives of contributing to growth and welfare. In this presentation for the Parmenides Foundation to an international workshop on
Systemic Risk and Regulatory Market Risk Measures, supported by the
Institute for New Economic Thinking, Seán Cleary argues for clarity on the aims of macro-prudential supervision regimes, and the challenges they face in addressing systemic financial risk, to ensure that the measures employed are fit for purpose.
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