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

Which policy measure is a macroprudential tool aimed at reducing systemic risk building up over the credit cycle?

Raising a countercyclical capital buffer is a macroprudential tool. It makes banks hold more capital when credit growth is excessive, building resilience against losses and curbing the procyclical build-up of systemic risk, unlike supervision of one bank, which is microprudential.

  1. ARaising the countercyclical capital buffer that banks must hold when credit growth is excessiveCorrect
  2. BCutting the income tax rate to stimulate household consumption
  3. CAuditing one bank's individual loan files for compliance with its own policies
  4. DSetting a fixed exchange rate against the US dollar
  5. Reducing the government's budget deficit over five years

Explanation

Macroprudential policy targets the stability of the system as a whole. A countercyclical capital buffer forces banks to build capital in booms so they can absorb losses and keep lending in downturns. Auditing a single bank is microprudential supervision, while tax cuts, exchange-rate pegs and deficit reduction are fiscal or exchange-rate policies.

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