FBI Book

CHAPTER 13
Financial Stability
OVERVIEW
Against the backdrop of the 2007–2009 financial crisis, this chapter discusses the growing importance of macroprudential supervision, which focuses on the stability of the financial system as a whole and therefore on the monitoring and assessment of so-called systemic risks.
The chapter sets out the key features of the conceptual framework for macroprudential supervision. The framework starts with identifying intermediate targets, also known as pillars. The first pillar examines financial imbalances, for which a cyclical approach is appropriate. The second pillar looks at externalities, for which a structural approach is appropriate. The failure of a large financial institution, for example, poses an externality to the financial system. Another externality is the interconnectedness of financial intermediaries. The next stage is to design macroprudential instruments or tools to achieve the targets.
On the cyclical side, countercyclical capital buffers and real estate related instruments are applied to contain credit growth and rising house prices. On the structural side, capital surcharges and resolution plans are applied to global systemically important financial institutions. This chapter also discusses the emerging institutional architecture for macroprudential supervision in the EU and the US.
Finally, this chapter touches upon the issue of crisis management and resolution, discussing the main reactive instruments that can be considered in crisis situations. The new Banking Union crisis management framework is analysed in detail. An important element is transferring responsibility for resolution from the national level to the
European level under the Single Resolution Mechanism, mirroring the Single
Supervisory Mechanism discussed in Chapter 12.
LEARNING OBJECTIVES
After you have studied this chapter, you should be able to:
• explain the concept of macroprudential supervision and the difference

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