A Macroprudential Approach to Financial Regulation

42 Pages Posted: 14 Nov 2010  

Samuel Gregory Hanson

Harvard Business School

Anil K. Kashyap

University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER); Federal Reserve Bank of Chicago

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 12, 2010

Abstract

Many observers have argued the regulatory framework in place prior to the global financial crisis was deficient because it was largely “microprudential” in nature (Crockett, 2000; Borio, Furfine, and Lowe, 2001; Borio, 2003; Kashyap and Stein, 2004; Kashyap, Rajan, and Stein, 2008; Brunnermeier et al., 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 financial institutions. By contrast, a “macroprudential” approach recognizes the importance of general-equilibrium effects, and seeks to safeguard the financial system as a whole. In the aftermath of the crisis, there seems to be agreement among both academics and policymakers that financial regulation needs to move in a macroprudential direction. According to Federal Reserve Chairman Ben Bernanke (2008): Going forward, a critical question for regulators and supervisors is what their appropriate "field of vision" should be. Under our current system of safety-and-soundness regulation, supervisors often focus on the financial conditions of individual institutions in isolation. An alternative approach, which has been called systemwide or macroprudential oversight, would broaden the mandate of regulators and supervisors to encompass consideration of potential systemic risks and weaknesses as well.

Suggested Citation

Hanson, Samuel Gregory and Kashyap, Anil K. and Stein, Jeremy C., A Macroprudential Approach to Financial Regulation (November 12, 2010). Chicago Booth Research Paper No. 10-29. Available at SSRN: https://ssrn.com/abstract=1708173 or http://dx.doi.org/10.2139/ssrn.1708173

Samuel Gregory Hanson

Harvard Business School ( email )

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Anil K. Kashyap (Contact Author)

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Jeremy C. Stein

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