Saturday, February 19, 2011

On “Macroprudential Oversight”

Economists must sometimes scrutinize political rhetoric and terms that allude to well-understood economic concepts, albeit with "spin." For example, the terminology of "too big to fail" is widely used by political commentators as justification for an expansion of regulatory controls over the financial services industry (for more about the meaning of "too big to fail," visit my related post entitled, Too Big to Fail, or Just Too Big?).

Lo and behold, we are now witnessing the arrival of a new political rhetoric that takes the false concept of "too big to fail" to the next level. This new terminology is encapsulated by the notion of "macroprudential oversight," which Dr Ben Bernanke, Chairman of the Federal Reserve Board, describes as follows:
Under our current system of safety-and-soundness regulation, supervisors often focus on the financial conditions of individual institutions in isolation. An alternative approach, which has been called system wide or macroprudential oversight [italics added], would broaden the mandate of regulators and supervisors to encompass consideration of potential systemic risks and weaknesses as well.
For the record, the terminology of “macroprudential oversight” is not found in the standard macroeconomics lexicon (and neither is the phrase, “too big to fail”). Moreover, I fear the public is being bamboozled into believing these concepts carry clear economic meanings, which is not the case. From where I sit, the quasi-economic notions of "too big to fail" and "macroprudential oversight" are experimental hypotheses at best. The public should be suspicious of claims that the Federal government has the regulatory know-how to institute "macroprudential oversight" of systemic risks and weaknesses within the US economy. I maintain that the more pragmatic approach for managing systemic risks within the financial services industry is to view firms that are "too big to fail," as also being "too big to keep around."

Source: Bernanke, B (2010, August 2), Bernanke's Speech on Economy at Jackson Hole Conference (Text), Bloomberg.

Related Posts:

Too Big to Fail, or Just Too Big?

1 comment:

Dr William J McKibbin said...

For more about the origins and evolution regarding the term "macroprudential," see: Clement, P. (2010, March). The Term “Macroprudential”: Origins and Evolution. BIS Quarterly Review, 59-67.

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