Macroprudential Policy, Leverage, and Bailouts

• Cato Journal
By Allan M. Malz

Macroprudential policy refers to a wide range of policy measures intended to avoid crises. It is presented as a primary means of responding to concerns about financial stability and as an alternative to monetary policy. Its promise, however, is overstated. Banks are inadequately capitalized, and public sector guarantees generate moral hazard and shift risk to the public. Macroprudential tools cannot compensate for an existing regulatory system that increases risks to financial stability. Macroprudential policy may also raise the inefficiency and evasion costs of financial regulation and widen the use of discretion. There is an alternative path that uses higher regulatory capital standards as an interim step toward gradually eliminating guarantees without destabilizing the financial system. Relying on macroprudential tools may lead to deemphasizing monetary policy at critical junctures and shifting the risk assessment of policymakers toward ease.

About the Author
Allan M. Malz