‘Macroprudential’: A Real Cure or Just a Buzzword?
By John Heltman
These days it is never enough for regulators to worry about one colossal bank without worrying about the system as a whole. But seven years after the crisis, “macroprudential” regulatory policy is still very much a work in progress. The goal is clear — to limit contagion risk — and policymakers have crafted rules with a sharp focus on systemic health. Yet there remains ample debate about whether the policy is succeeding, or regulators have merely repackaged rules that still fundamentally address discrete bank risk. Many say that the clearest macroprudential devices are still untested. Macroprudential is “a buzzword that people throw around, but it’s not that clear what it means, and how to operationalize it,” said Anat Admati, a professor of economics at Stanford University. “It says, and we kind of know from the crisis, that you have to watch the system. The tools that they have are still essentially micro tools in the end.” But
observers say the strategy is still opaque. Regulations focused on the largest banks — and their systemic footprints — have a macroprudential effect by
design. Yet in some cases, the Fed and other regulators have appeared to rely on microprudential rules to resolve macroprudential concerns. For example,
heightened capital requirements are hailed as aiding market stability, but at their core address the strength of individual institutions. Meanwhile, other
tools seen as addressing systemic issues head on — such as the Financial Stability Oversight Council’s authority to deal with activities that threaten
financial stability — remain largely untried. The FSOC — created by Dodd-Frank specifically to identify macroprudential risks — has signaled its intent to
take an activities-based approach to asset managers rather than focus on individually risky firms. But that process is still in the very early stages.
The law also created a new regime for resolving failed behemoths in a manner that protects the system, but it has not yet been called into action. “None
of the macro tools, with the potential exception of the stress tests, have been well-enough implemented to provide an extra level of macro stress protection,
and even then only with the big banks,” said Karen Shaw Petrou, managing principal at Federal Financial Analytics. “So we don’t know.”