Macroprudential Policy

The aim of macroprudential policy is to mitigate and prevent systemic risk, which can be defined as a risk of disruption to financial services caused by an impairment of all (or a large part) of the financial system, and which has the potential to have serious negative consequences for the real economy.

Systemic risk can manifest itself in the form of contagion between financial institutions, shock amplifications (for example, caused by the similar exposures of several financial system participants to a shared risk) or financial imbalances (such as bubbles or excessive credit growth).

The scope of macroprudential policy is thus very broad. It deals with all the financial institutions, including banks and insurance companies, shadow banking entities, market infrastructures, and payment systems.


In order to be effective, the implementation of macroprudential policy is an ongoing cycle comprised of four different stages:

  • The ex-ante evaluation of systemic risk. The macroprudential should regularly monitors the financial sector as a whole, in order to identify systemic risks sufficiently early ;
  • The selection and calibration of the relevant instruments once a systemic risk has been found to exist ;
  • The implementation of the chosen macroprudential policy. Attention should be paid to the exact timing of the action, in order to ensure maximum efficiency. Indeed, implementing a measure at the wrong time could have unexpected and undesirable consequences: too early and market participants could find a way to circumvent it; too late and the identified risks may already have materialised, making the measure less efficient ;
  • Finally, the evaluation of the measures that have been implemented. This step is necessary to check, ex post, if the measures have had the desired effects in terms of mitigating the systemic risk, and to adjust them where warranted.

Interactions with other policies

The macroprudential policy is closely linked to many other policies, including microprudential and monetary policies. Complementarities, but also sometimes conflicts of interest can be observed between these policies.

In principle, microprudential monitoring and macroprudential policy should work together. However, tensions mays also sometimes arise, in particular in time of crisis. In that case, the microprudential perspective would seek to increase the capital requirement for the banks, in order to diminish credit growth, whereas the macroprudential institutions would call for a reduction in the capital buffer implemented during the cyclical upturn to avoid a credit crunch and an economic downturn. The strong links between microprudential and macroprudential policies are another argument in favour of an institutional setup which facilitates dialogue between regulators and, if necessary, provides decision-making procedures.

Strong complementarities and interactions exist between monetary and macroprudential policy. Macroprudential measures in favour of financial stability contribute to monetary policy by protecting the economy from financial disruptions. Conversely, macroeconomic stability reduces the procyclical tendencies of the financial system, which limits systemic risk. This interdependance explains why central banks have a strong incentive to promote macroprudential policy, and why they are usually strongly involved in the macroprudential authorities.

French and European institutional framework

France has had an institutional framework in place to facilitate cooperation between supervisory authorities since the end of the 1990s. It initially took the form of the Collège des autorités de contrôle des entreprises du secteur financier (CACES - College of Supervisory Authorities for Companies in the Financial Sector), which was set up in 1999 and tasked with “facilitating the exchange of information between supervisory authorities”. However, as a consensus began to emerge on the need for a global system of financial supervision, efforts were made to develop a more formal framework of macroprudential oversight, resulting in the creation in 2010 of the Conseil de la régulation financière et du risque systémique (COREFRIS) to replace the CACES. At the same time, COREFRIS’ mandate was extended to “[examining] analyses of the situation of the sector and of the financial markets and [evaluating] the associated systemic risks”.

The French Law on the Separation and Regulation of Banking Activities (July the 26th, 2013) reinforced the country’s system of macroprudential supervision: COREFRIS was transformed into the HCSF, and the new body was assigned an explicit mandate to safeguard financial stability, along with legally binding powers of intervention.

At EU-level, the institutional framework for the supervision of systemic risk was set up on the recommendation of the High Level Group chaired by Jacques de Larosière: the European Systemic Risk Board (ESRB), which was established in December 2010, is tasked with the macroprudential oversight of the financial system within the EU and, where needed, with coordinating the intervention of the various national authorities.

Moreover, the creation of the Single Supervisory Mechanism (SSM), under the aegis of the ECB, also reinforced the european institutionnal framework: although national macroprudential authorities retain primary responsibility for intervention, the ECB has the right to step in and tighten macroprudential measures taken by individual states which have joined the SSM.

Strengthening the global stability of the economy

The 2007-2009 global financial crisis demonstrated that, in order to maintain financial stablity, it is essential to supplement a microprudential approach with a macroprudential approach aimed at mitigating systemic risk. Given the strong interconnections between financial institutions, their links to the real economy (via the credit channel for example), and the predominant size of some of them, imbalances in the financial sector can threaten the global economy. As a consequence, it appears necessary to consider the financial and monetary system as a whole, in order to reduce the likelihood of contagion and to strengthen the global stability of the economy.