The benefits and drawbacks arising from the harmonisation of macro-prudential supervision and micro-prudential supervision

Abstract

Regulators are concerned with the protection of investors and consumers, the stability of the financial system and in ensuring fair, transparent and efficient markets. Regulators achieve their objectives by using micro-prudential and macro-prudential policies. These two types of regulation aim to ensure the stability of a country’s financial system although their methods and approaches differ. Micro-prudential policy tends to target individual players within a market in order to ensure the stability of the financial system while macro-prudential policy looks at the bigger picture and focuses on the market as a whole rather than individual institutions. Both forms of regulation tend to exist within separate institutions and the aim of this study is to weigh the benefits and/or consequences that are to be had if one authority was to be made responsible for both micro-prudential policy and macro-prudential policy. While there are benefits to having the two forms of financial regulation separate there are drawbacks to having them administered by separate institutions. This study will contrast and compare the benefits and shortcomings of the two forms of administering the two types of regulation.