Macroprudential Policy: Taming the wild gyrations of credit by Richard Barwell (auth.)

By Richard Barwell (auth.)

The monetary challenge of 2008 is without doubt one of the unmarried most crucial fiscal occasion in post-war background. Macroprudential coverage is the reaction to that predicament – a decided try and stabilize the economic climate. This publication explains why it will be important, who can be chargeable for executing this accountability and the way they'll move approximately doing it.

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Additional info for Macroprudential Policy: Taming the wild gyrations of credit flows, debt stocks and asset prices

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20 Macroprudential Policy Of course, for a given portfolio of assets, the large the buffer, the further the bank is from the default boundary and the lower the probability of default. If we are willing to make seemingly innocuous assumptions about the distribution of returns on a portfolio of assets – namely, that the distribution function of returns is smooth and regular with a negative second derivative in the lower tail – then it ought to be the case that there are diminishing returns in terms of reducing the probability of an individual bank becoming insolvent from each incremental percentage-point increase in capital requirements.

It is viewed as an essential piece of the policy jigsaw, which will help to deliver a more stable trajectory for the financial system and wider economy going forward. This chapter defines that macroprudential perspective and where it fits in relative to the existing microprudential and monetary policy regimes. We begin with a brief review of the lineage of the term, which is discussed at length in Clement’s (2010) article, where it is noted that: In the wake of the recent financial crisis, the term ‘macroprudential’ has become a true buzzword.

Much of that saving was held in the form of advancedeconomy government bonds, displacing investors into other assets. That wall of money helped to fuel the rapid and intertwined expansion of both the global banking system and securitization markets – the key fault lines of the crisis of 2007/08 (Bernanke, 2011a). 2 The doom loop Haldane offers a more depressing explanation for the worrisome trend in the scale and frequency of financial crisis. The authorities and the regulatory regimes they put in place to maintain financial stability are not undone by delusion but rather a failure to appreciate how the behaviours that ultimately give rise to a crisis are a direct consequence of their own actions.

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