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Macroprudential Policy: CNBC Explains

Siegfried Layda | Getty Images

In the aftermath of the global financial crisis, a strong interest developed in something called "macroprudential policy," which has become popular among central bankers and financial regulators.

Mainstream economics traditionally viewed the financial system as an intermediary that was not itself a source of economic risk. Asset bubbles were deemed important only when they affected the real economy. At worst, financial institutions were channels through which economic shocks might be passed or amplified, rather than the source of the shocks themselves.

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Much of the regulatory apparatus in place before the financial crisis was aimed at protecting investors or assuring institutions' soundness with government insured depository accounts. Very little attention was paid to risks that might build up across or between institutions, what we now call systemic risks.

The financial crisis and the prolonged economic slump that followed led to renewed interest in containing or minimizing the risk originating in the financial system. Policymakers began to look for tools to reduce the severity and frequency of asset bubbles and excessive credit growth. And there's renewed attention to providing shock-absorber policies to prevent the damage asset bubbles and credit excess can inflict on the wider economy.

In short, macroprudential policies are anti-bubble policies.

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Some of the tools of macroprudential policy include improved and adjustable (or countercyclical) capital adequacy, liquidity and reserve requirements; expanded supervisory roles for regulators over a broader array of financially important companies; regulation of underwriting standards; margin regulation; and the use of standard monetary policy tools—such as interest rate targets—to deflate bubbles and avoid potential bubbles.

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