The financial crisis of 2007-2009 strongly altered the view of regulation and supervision of financial institutions. Microprudential regulation and supervision – directed at the individual institution – had not prevented the crisis, but had contributed to it or at least made it worse (Hellwig 2009). Therefore, there is now a broad consensus that supervision ought to include a macroprudential perspective that focuses on the stability of the entire financial system rather than on individual institutions.
To this end, in the EU, a large number of new institutions and regulatory instruments have been created. This has resulted in a complex web of macroprudential supervisory structures and a large new toolkit, which has raised great expectations regarding the effectiveness of the new approach. This column presents and critically evaluates the newly created macroprudential framework in the Eurozone, with a particular focus on Germany. We make the following major suggestions:
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In the Eurozone, macroprudential supervision should be integrated (comprising all sectors of the financial system), federally organised and located outside the ECB. Moreover, it should be combined with microprudential supervision.
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At the national level, the influence of politics should be strictly limited.
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To avoid delayed responses, commitment should be strengthened by gradually moving towards a more rule-based approach.
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In view of the macroprudential tools’ uncertain and limited effectiveness, macroprudential supervision should rely on robust tools and avoid excessive fine-tuning.
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Finally, macroprudential policy should not be overburdened and central banks should stand ready to deal with emerging threats to financial stability, especially when additional risks arise from monetary policy.
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