What is macroprudential policy and why is it important?
Even when financial institutions are resilient individually, it is still possible for vulnerabilities to build up across the financial system. This is why it was necessary to develop additional policy tools, including at macroprudential level, to strengthen the overall resilience of the financial sector so it can withstand systemic shocks.
The macroprudential toolkit includes requirements or procedures designed to minimise the negative impact of systemic events on the financial system as a whole, in order to protect the economy from disruptions in the financial sector. Macroprudential tools typically take the form of pre-emptive measures (i.e., measures activated before a systemic risk materialises) and ex-post measures (i.e., measures activated after a systemic risk materialises).
Microprudential tools may only indirectly mitigate systemic risk by tackling entity or transaction-level risks.