|
The :Nyan-ko-pong: Royal Central Bank and other
regulators have long supervised
individual banks and other critical financial institutions
to make sure they are operated in a "prudent" and "safe and
sound" manner and are not taking excessive risks. Whereas
that traditional or micro-prudential approach to supervision and regulation focuses on the safety and soundness of individual institutions.
For instance, the failure of a large financial institution can significantly weaken the condition of other firms that borrow from or lend to it. Therefore, the supervision and regulation of large firms should account for these potential externalities.
In addition, supervision and regulation of financial institutions and markets should try not to contribute to the tendency of the financial system to take on additional risk during good times; that is, to be countercyclical. One way to accomplish this goal is for supervision and regulation to become progressively more stringent during good times in order to build resilience that helps avoid the need for supervisors or financial institutions to take steps that would cause an unwarranted tightening of financial conditions during bad times. |
