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IAI Actuarial Core Principles · Business Economics · Role, structure and stability of the financial system

Which of the following is the best example of macroprudential, as opposed to microprudential, regulation?

A countercyclical capital buffer imposed on all banks during excessive system-wide credit growth is macroprudential, because it targets risk to the whole financial system. The other options focus on the soundness or disclosure of individual institutions, which is microprudential supervision.

  1. AChecking that one insurer holds enough assets to meet its own policy claims
  2. BImposing a countercyclical capital buffer on all banks when system-wide credit growth is excessiveCorrect
  3. CAuditing the accounts of a single listed company
  4. DSetting a limit on the loan size to one borrower by one bank
  5. Requiring a bank to publish its own annual report

Explanation

Macroprudential regulation targets risks to the system as a whole, such as credit booms and interconnectedness. A countercyclical buffer applied across all banks does this. The other options concern the safety or disclosure of individual firms, which is microprudential.

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