Macroprudential Regulation and Supervision: Different Strokes for Different Folks

Gillian Garcia

Chapter 5 in Innovative Federal Reserve Policies During the Great Financial Crisis, 2018, pp 143-171 from World Scientific Publishing Co. Pte. Ltd.

Abstract: FDICIA’s prompt corrective action did not prevent a subsequent financial crisis. After the 2007–2008 crisis, the international financial community turned to macroprudential regulation/supervision to forestall future financial crises. While many countries enthusiastically adopted macroprudential policies, U.S. adoption is thwarted by its clumsy supervisory system. Aided by its unshared responsibility for overseeing financial holding companies, the Federal Reserve is working with the Basel Committee and other international bodies to increase the resilience of large systemically important financial institutions by raising their capital standards, imposing liquidity requirements, testing their ability to withstand stress, requiring them to make plans for recovery and resolution, and revamping supervision. The Fed’s efforts can be criticized, however. First, its actions are still largely micro- rather than macroprudential. Second, its confidential rules are open to court challenge when they do not conform to the Administrative Procedures Act. Third, by dovetailing regulatory requirements to banks’ stress tests, the Fed violates the American presumption that similar institutions will face identical regulatory requirements. Fourth, while FDICIA favored rules over discretion, Fed discretion now rules according to the Board and the staff’s best judgment. Fifth, the Fed’s rules have become so complex and its supervisory actions so opaque that accountability to the press, Congress and the public is deficient. These developments are not healthy in a democracy.

Keywords: Monetary Policy; Financial History; United States of America; Federal Reserve; Housing; Macroprudential Regulation; Quantitative Easing; Financial-Stability Tool; Recession; Financial Crisis (search for similar items in EconPapers)
JEL-codes: G01 (search for similar items in EconPapers)
Date: 2018
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