![]() Although there is wide agreement that macroprudential policy is needed to limit systemic risk, there has been very little detail about how it might work. Hence the calls for “macroprudential” regulation to prevent failures of the financial system as a whole. ![]() ![]() Banks lend to each other as well as to customers, so one firm's failure can quickly cause others to fall over, too.īecause of these connections, rules to ensure the soundness of each bank are not enough to keep the banking system safe. The scope for nasty spillovers is increased by direct linkages. What is safe for one institution becomes dangerous if they all do the same, which is often how financial trouble starts. Each bank's appetite for lending rises and falls in sync. They expose themselves to similar risks by making the same sorts of loans.
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