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Macroprudential Oversight

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Mapping Financial Stability

Part of the book series: Computational Risk Management ((Comp. Risk Mgmt))

Abstract

Paraphrasing Milton Friedman’s statement about Keynesians, Borio (2011) stated “We are all macroprudentialists now”. This chapter provides an overview of macroprudential oversight. It focuses first on the definition of financial systems and financial (in)stability, as well as fragilities in financial systems, and the concept of systemic risk. After this, we briefly summarize some theoretical and empirical underpinnings of three identified forms of systemic risk. Then, the main focus of this chapter is to give an overview of the state of the art of risk assessment and identification tools used by macroprudential policymakers, especially the use of visualization tools. Finally, we relate the fragilities, risks and tools to the macroprudential oversight process, and summarize key implications of this chapter for the rest of the book.

In the absence of clear guidance from existing analytical frameworks, policy-makers had to place particular reliance on our experience. Judgement and experience inevitably played a key role. [...] But relying on judgement inevitably involves risks. We need macroeconomic and financial models to discipline and structure our judgemental analysis. How should such models evolve?

–Jean-Claude Trichet, President of the ECB, Frankfurt am Main,18 November 2010

This chapter is partly based upon previous research. Please see the following work for further information: Sarlin (2014a).

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Notes

  1. 1.

    There are many coincident stress indices. For instance, Illing and Liu (2006) focus on measuring financial stress in Canada and Hakkio and Keeton (2009) discuss more broadly what financial stress is, how it can be measured and why it matters. Cardarelli et al. (2011) and Balakrishnan et al. (2009) construct financial stability indices for a broad set of advanced and emerging economies, whereas the CISS aims at measuring stress in the euro area.

  2. 2.

    The authors state that the definitions of starting and ending dates of the assessed crisis episodes are somewhat arbitrary. Similarly, the assessed crisis episodes are arbitrary, as some episodes in between the assessed ones are disregarded, such as Russia’s default in 1999 and the collapse of Long-Term Capital Management. Introduction of judgment based upon market intelligence and technical adjustments are motivated when the GFSM is “unable to fully account for extreme events surpassing historical experience”, which is indeed an obstacle for empirical models, but also a factor of uncertainty in terms of future performance since nothing assures manual detection of vulnerabilities, risks and triggers.

  3. 3.

    A macroprudential supervisory body is an institution tasked with macroprudential oversight of the financial system and the mandate of safeguarding financial stability. Examples are the European Systemic Risk Board in Europe, the Financial Policy Committee in the UK, and the Financial Stability Oversight Council in the US.

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Authors and Affiliations

  1. Centre of Excellence SAFE, Goethe University Frankfurt, Grüneburgplatz 1, 60323, Frankfurt am Main, Germany

    Peter Sarlin

  2. RiskLab Finland, IAMSR Åbo Akademi University, Turku, Finland

    Peter Sarlin

  3. Arcada University of Applied Sciences, Helsinki, Finland

    Peter Sarlin

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  1. Peter Sarlin
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Sarlin, P. (2014). Macroprudential Oversight. In: Mapping Financial Stability. Computational Risk Management. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-54956-4_2

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