Macroprudential policy

Published: 7/6/2024
Macroprudential policy is directed at mitigating systemic risks and strengthening the financial institutions’ resilience to potential shocks, with the aim of preserving overall financial system stability.

The past global financial crisis uncovered considerable deficiencies in the area of financial supervision, which previously did not take into account systemic risks arising from the interconnectedness between the developments in the macroeconomic environment and the financial system to a sufficient extent. The post-crisis period was thus marked by important regulatory changes on a global level, which put in place the basis of macroprudential policy in addition to the new approach to the assessment and management of risks in the financial system. Thanks to these reforms, macroprudential policy-makers have a mandate to preserve the stability of the financial system. They now have at their disposal a set of instruments for the execution of this task, such as capital buffers, measures aimed at preserving the liquidity of the financial institutions, measures ensuring sustainable lending conditions and others. The selection among the available instruments depends on the type and intensity of systemic risk to be addressed. The appropriate instrument is the one that best targets the identified systemic risks and their sources, in a manner that is proportional to the magnitude of risk and ensuring that the possibility of its avoidance by transferring the activity to less regulated financial sectors (regulatory arbitrage) or to other countries with more relaxed regulatory requirements (cross-border leakage) is as small as possible.

The cycle of macroprudential policy implementation consists of four stages. The first stage includes systemic risk assessment, based on which the competent macroprudential bodies evaluate a potential need to activate macroprudential policy measures with regard to the assessed risks to financial stability. In the case of actions, the next step is to select the instruments that most effectively address the risks.. Instruments are calibrated proportionally to the assessed level of systemic risk: when it is high, stricter measures are required. In the next step, measures are implemented. It is important to take account of coordination with other economic policy measures (e.g. monetary, fiscal or supervisory policies), which could also impact the risks to financial stability. In this stage, timely and clear communication with the financial sector, general public and other interested parties (including EU bodies and regulators of other countries) is essential to ensure the transparency and credibility of macroprudential policy. Finally, the implementation of measures should be monitored regularly and after a certain time its effectiveness in achieving the set objectives should be assessed. If the analysis establishes that risks are not sufficiently mitigated, the measure may be additionally tightened and/or complemented with another measure. By contrast, if in the meantime systemic vulnerabilities have decreased or ceased to exist, the regulator may relax or cancel the measure.

Macroprudential policy implementation cycle

Source: ESRB (2014) Flagship Report on Macro-prudential Policy in the Banking Sector

In the European Union the formulation and implementation of macroprudential policy is the task of the national macroprudential policy bodies. This role is typically assigned to central banks or financial system supervisors (if they are separate from the central bank), and/or inter-institutional bodies responsible for the maintenance of financial stability, in which these institutions participate (e.g. financial stability councils or boards). In addition, macroprudential policy may also be within the competence of other bodies. In the Republic of Croatia, the Financial Stability Council is the body responsible for designing of national macroprudential policy and the Croatian National Bank (for credit institutions) and the Croatian Financial Services Supervisory Agency (for other financial institutions) are responsible for the implementation of macroprudential policy within the scope of their competences.

In addition to macroprudential policy, the supervision of individual credit institutions, (microprudential supervision or supervision) also contributes to the maintenance of the stability of the financial system as a whole. Due to their specific business, credit institutions operate according to a strict regulatory framework [LINK NA RUBRIKU Regulations], which establishes responsibilities and rules for the efficient management of risks and capitalisation of credit institutions. All of this contributes to maintaining confidence in the banking system and promoting and preserving its safety and stability, which are also the basic objectives of supervision carried out by the Croatian National Bank.