Document Type
Article
Publication Date
2024
Abstract
According to conventional wisdom, the 2008 fnancial crisis fundamen- tally changed how policymakers approach fnancial regulation. Before the crisis, regulators sought to prevent individual fnancial institutions from collapsing, but this “microprudential” strategy proved inadequate to stop the market-wide meltdown. In response, policymakers purportedly turned to a new “macroprudential” approach that prioritizes the stability of the fnancial system as a whole instead of individual institutions in isolation. Regulators in the United States and abroad enthusiastically embraced macroprudential policy, implementing stress tests, capital buffers, liquidity requirements, and other supposed macroprudential tools. As the United States’ top bank regulator declared in 2015, “[W]e are all macroprudentialists now.”
There is just one problem, though, with using the term “macropruden- tial” to describe modern fnancial regulation: it is a myth. Despite the macroprudential label, the prevailing regulatory framework is still pre- dominantly microprudential in nature. Although some post-2008 policy innovations nudged fnancial oversight in a macroprudential direction, the dominant tools fnancial regulators use today are just supersized versions of the microprudential approaches that have existed for deca- des. This shortcoming has serious economic consequences. As recur- ring fnancial disruptions—including the panic following Silicon Valley Bank’s failure—have vividly demonstrated, microprudential regulation is prone to overlooking interconnections and other systemic vulnerabil- ities. Accordingly, this Article proposes a roadmap to reorient the regula- tory framework toward the macroprudential approach that the modern fnancial system demands.
Recommended Citation
Kress, Jeremy C. and Jeffery Y. Zhang. "The Macroprudential Myth." Georgetown Law Journal 112 (2024): 569-638.
Included in
Banking and Finance Law Commons, Finance Commons, Law and Economics Commons, Macroeconomics Commons, Securities Law Commons
Comments
Copyright 2024 by The Georgetown Law Journal Association. For all articles in which it holds copyright, the Journal permits copies to be made for classroom use, provided that the user notifies the Office of Journal Administration of having made such copies, that the author and The Georgetown Law Journal are identified, and that the proper notice of copyright is affixed to each copy.
Originally published as Kress, Jeremy C. and Jeffery Y. Zhang. "The Macroprudential Myth." Georgetown Law Journal 112 (2024): 569-638.