Macro Prudentialism In The Financial System

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The advent of the recent financial crisis has signalled the importance of having a total picture of the overall financial system instead of earlier focus by academicians and policy makers on individual banks. This new approach is termed as the Macro-prudential perspective and tries to understand the interconnectedness of financial institutions as well the effect of pro-cyclicality (the tendency for problems to be hidden during boom and exposed during crisis) to the financial system and the overall economy. Such totalitarian approach needs an effective system to identify those financial institutions with the capacity to distract the operations of financial markets or with the ability to breakdown the entire financial system. This paper
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The other side claim the negative aspect of such institutions from their ability to disturb and destroy the financial system and the economy. Walter (2012) claims that, those economists who approach the SIFI from their destroying ability, suggest policies that guarantee their existence because; their bankruptcy would have a devastating effect to the economy and financial system. Regardless of how it is looked at identification of SIFI is part of Macro-prudential regulation. Macro-prudential regulation aims at mitigating the systemic risk or a risk with potential to disrupt the financial system in its entirety, which contrasts with the risk related to specific bank (macro-prudential…show more content…
This being said the focus was mostly on banks. However, in US the regulation (Dodd-Frank Act) on the other hand the focus was more on non-banking financial institutions and other companies. Bongini and Nieri (2014) point out two important reasons; they already have a criteria for categorizing SIFI, and shadow banking was the reason behind the mortgage crisis. In the first case, any retail bank or group of banks is categorized as SIFI, if its total asset exceeds 50 Billion Dollar, meaning size was used the main criteria in this case. In the second case, the role of the shadow banking which were not properly regulated under the existing financial system was very big in the latest financial crisis, so the authorities were eager to put these organizations under control. The focus of Dodd-Frank act was to identify and find all the institutions, which have huge contribution to the systemic risk and put strict controls and regulation to discourage them from taking riskier transactions and

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