Macroprudential policy aims to maintain overall financial system stability by mitigating systemic risk. Systemic risk is potential instability caused by contagion in part or all of the financial system due to interactions in terms of business size, complexity, interconnectedness and procyclicality.
Experience has shown that monetary stability and microprudential soundness alone are insufficient to prevent a crisis, considering that the 2008 crisis occurred during stable macroeconomic conditions. Monetary policy tends not to capture signals indicating a build-up of risk induced by risk-taking behaviour amongst elements of the financial system, for instance a simultaneous increase of mortgage loans in the banking industry.
Meanwhile, macroprudential policy, which focuses on the soundness of individual institutions, is also insufficient by itself to detect the intertemporal accumulation of risk. Therefore, a policy mix is required where macroprudential policy complements monetary policy, macroprudential policy and fiscal policy in order to maintain financial system stability.
