A Macroprudential Approach to Financial Regulation

M any observers have argued that the regulatory framework in place prior to the global fi nancial crisis was defi cient because it was largely “microprudential” in nature (Crockett, 2000; Borio, Furfi ne, and Lowe, 2001; Borio, 2003; Kashyap and Stein, 2004; Kashyap, Rajan, and Stein, 2008; Brunnermeier, Crockett, Goodhart, Persaud, and Shin, 2009; Bank of England, 2009; French et al., 2010). A microprudential approach is one in which regulation is partial equilibrium in its conception and aimed at preventing the costly failure of individual fi nancial institutions. By contrast, a “macroprudential” approach recognizes the importance of general equilibrium effects, and seeks to safeguard the fi nancial system as a whole. In the aftermath of the crisis, there seems to be agreement among both academics and policymakers that fi nancial regulation needs to move in a macroprudential direction. For example, according to Federal Reserve Chairman Ben Bernanke (2008): A Macroprudential Approach to Financial Regulation