Volume 112

The Macroprudential Myth

by Jeremy C. Kress & Jeffery Y. Zhang

According to conventional wisdom, the 2008 financial crisis fundamentally changed how policymakers approach financial regulation. Before the crisis, regulators sought to prevent individual financial 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 financial 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 “macroprudential” to describe modern financial regulation: it is a myth. Despite the macroprudential label, the prevailing regulatory framework is still predominantly microprudential in nature. Although some post-2008 policy innovations nudged financial oversight in a macroprudential direction, the dominant tools financial regulators use today are just supersized versions of the microprudential approaches that have existed for decades. This shortcoming has serious economic consequences. As recurring financial disruptionsincluding the panic following Silicon Valley Bank’s failurehave vividly demonstrated, microprudential regulation is prone to overlooking interconnections and other systemic vulnerabilities. Accordingly, this Article proposes a roadmap to reorient the regula-tory framework toward the macroprudential approach that the modern financial system demands.

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