Macro and microprudential supervision
Two sides of the same coin
As the global financial crisis has unfolded the industry has grown accustomed to debating a new concept - that of macroprudential supervision and its focus on risks affecting the financial system as a whole. Much of the debate has until now been abstract. However, the publication last month of the minutes and recommendations of the Interim Financial Policy Committee has given UK firms their first insights into how macroprudential supervision will operate in practice, including how the Financial Policy Committee and Financial Services Authority will work together to identify, explore and ultimately deal with risks to financial stability.
The focus on both macro- and microprudential supervision is an essential part of the response to the crisis. It is clear that what starts "macro" quickly becomes "micro", requiring individual firms to come to terms with a new and quite different regulatory operating model and a new set of priority actions. The microprudential regulator's own work programme will at times be displaced by that of the macroprudential regulator. There will be further, and quite likely extensive data requests which, without strong international co-ordination, could compete with those made by global and regional financial stability bodies. Public pronouncements by macroprudential regulators will be dissected for signs of emerging risks and concerns and clarity about the status of these statements will be essential. Otherwise the focus on the big issues that really matter, which is rapidly becoming the hallmark of the prudential supervisors in the UK, will blur.