A framework for macroprudential regulation that defines systemic risk and macroprudential policy, describes macroprudential tools, and surveys the effectiveness of existing macroprudential regulation.
The recent financial crisis has shattered all standard approaches to banking regulation. Regulators now recognize that banking regulation cannot be simply based on individual financial institutions' risks. Instead, systemic risk and macroprudential regulation have come to the forefront of the new regulatory paradigm. Yet our knowledge of these two core aspects of regulation is still limited and fragmented. This book offers a framework for understanding the reasons for the regulatory shift from a microprudential to a macroprudential approach to financial regulation. It defines systemic risk and macroprudential policy, cutting through the generalized confusion as to their meaning; contrasts macroprudential to microprudential approaches; discusses the interaction of macroprudential policy with macroeconomic policy (monetary policy in particular); and describes macroprudential tools and experiences with macroprudential regulation around the world.
The book also considers the remaining challenges for establishing effective macroprudential policy and broader issues in regulatory reform. These include the optimal size and structure of the financial system, the multiplicity of regulatory bodies in the United States, the supervision of cross-border financial institutions, and the need for international cooperation on macroprudential policies.
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Xavier Freixas is Professor at the Universitat Pompeu Fabra, and Barcelona Graduate School of Economics and coauthor of Microeconomics of Banking (MIT Press).
Luc Laeven is the Director-General of the Directorate General Research of the European Central Bank and coeditor of Deposit Insurance around the World (MIT Press).
José-Luis Peydró is ICREA Research Professor at the Universitat Pompeu Fabra.
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