Systemic Risk and Macro-Prudential Regulation

Overview

Systemic risk can develop rapidly, it is often unpredictable, dynamic and evolving. It involves multiple parts of the financial system and its crystallisation usually takes different forms with far reaching and sometimes global consequences.

The causes of the global financial crisis of 2007-2008 are often attributed to global macro-economic imbalances which led to rapid growth in global liquidity and falls in real risk-free interest rates in many economies. Prior to the crisis there had been little attempt by major economies to regulate the volume of credit as it expanded and drove economic growth to unsustainable levels, including the over-inflation of prices in some asset classes. One of the most significant agreed policy responses to the crisis was a commitment from policymakers to reform regulation to reduce procyclicality and to implement counter-cyclical macroprudential supervision. The recent Covid-19 pandemic has also highlighted the necessity of a comprehensive set of policies to address large and disruptive shocks to the financial system.