The imprudence of macroprudential policy

Many academic economists have taken stock of existing theories in search of an explanatory framework in the aftermath of the 2007-2009 financial crisis. The systemic orientation of the macroprudential approach may be contrasted with that of the traditional, or 'microprudential,' approach to regulation and supervision, which is concerned primarily with the safety and soundness of individual institutions, markets, or infrastructures. Because of the highly interconnected nature of our financial system, macroprudential oversight must be concerned with all major segments of the financial sector, including financial institutions, markets, and infrastructures. It must also place particular emphasis on understanding the complex linkages and interdependencies among institutions and markets, as these linkages determine how instability may be propagated throughout the system. Putting macroprudential policy into operation necessarily entails a significantly larger share of market activity being decided by nonmarket actors.