Macroprudential Policy
Keeping individual financial institutions sound is not enough. Policymakers need a broader approach to safeguard the financial system as a whole. They can use macroprudential policy to achieve this goal.
Policymakers have traditionally focused on individual financial institutions to ensure that they are safe, sound, and able to honor their obligations—especially institutions like commercial banks that collect funds from the general public. But the global financial crisis has exposed the limitations of this traditional approach, known as microprudential policy.
By focusing mainly on individual firms, policymakers unwittingly allowed system-wide financial risks to grow unchecked. Since the crisis, many countries are expanding their toolkits to explore a more systemic approach to financial regulation and supervision. This holistic approach is called macroprudential policy.
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