Macroprudential policy refers to a set of financial regulations and oversight tools aimed at safeguarding the stability of the financial system as a whole (the “macro” part), rather than focusing on individual institutions (which would be “microprudential” regulation).

In simple terms:

Macroprudential policy = Risk management for the entire financial system.

Key Goals:

  1. Prevent systemic risk: Avoid financial crises that spread across the whole economy (like the 2008 crisis).
  2. Curb excessive credit growth and asset bubbles: Especially when lending and housing prices rise too fast.
  3. Ensure resilience: Make sure banks and the financial system can absorb shocks.

Common Macroprudential Tools:

Tool What it does
Countercyclical capital buffers Require banks to hold more capital during booms so they can handle downturns.
Loan-to-Value (LTV) limits Restrict how much people can borrow against property value (e.g., 80% max of home price).
Debt-to-Income (DTI) limits Cap how much households can borrow based on their income.
Stress testing Check if banks can survive hypothetical shocks.
Limits on credit growth Try to slow down lending booms before they overheat the economy.

Example:

In a housing boom, macroprudential authorities might:

Let me know if you want a comparison with microprudential policy or how this works in specific countries like Japan, the EU, or the US.

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