Research paper-Economics Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Background

Macroprudential regulation is a method of economic analysis that basically evaluates the soundness, vulnerabilities and the health of a financial system. The purpose of marcoprudential regulation explains the approach and idea to financial regulation that is aimed to mitigate the risk of the financial system as a whole.

After the global financial crisis of 2008, there has been an increasing in consensus within the policymakers and the economic researchers where they look to reorient the regulatory frameworks towards the Macroprudential perspective. The concept of marcoprudential regulation helps in focusing on qualitative data which is related to financial institutions and the overall regulatory environment which helps in obtaining an additional sense of the vulnerabilities and the strengths of the system (Charap, J., 2011).

To assess the overall performance of the financial system of a country, Macroprudential analysis helps in identifying and indicating the data which can provide the data on the health of these institutions as a whole which includes the asset quality, capital adequacy, profitability, management performance, sensitivity to systematic risks and the liquidity. Finally, Macroprudential data also look at the major components of the financial market, which includes the prevailing credit ratings and also the yields and the already defined market prices of the financial instruments (Jacome, 2012).

Introduction

The recent financial crisis that the world faced in the year 2008 have triggered impressive amount of new policy initiatives and also the recommendations. Various countries and their reserve banks have aimed at developing Macroprudential regulations that intend to address the systematic risk and the pro cyclicality in the financial system. With this aspect, it is even more challenging to assign objectives to the Macroprudential policies while also avoiding the asset price bubbles. It is a clear fact, that the current financial crisis has been a consequence of the bust in a financial price bubble that took place in the United States which further spread out to other parts of the world also. It has been an open debate where the central banks have to take the charge of the situation and look to overcome the imbalance and the various factors that are involved in the asset prices while overcoming the reaction of function of price stability (Federico, 2012).

To make a case for the country and its macroeconomic policies, the financial institutions have looked to focus on the various aspects and elements of Macroprudential policies. A major portion of the countries believe that the main instruments are the factors that should be overcome, such as credit expansion, leverage rations, controlling degree of maturity transformation, etc. It is quite clear that bubbles are hard to detect. It is a principal objective of Macroprudential regulation to avoid bubbles; therefore it is a designated tool which addresses to the issue of bust and bubbles (Federico, 2012). Along with this, asset price cycles are a systematic way in which busts are relatively rate and occur in extreme events where they set automatic rules which are based on the asset price development and the credit expansions which helps the economy to grow and it also helps to overcome the current situation. Therefore it is necessary to account and calculate the costs that are important to analyze for the new macro prudential regulations. The macroeconomic aspects are therefore relevant to the effective designing of the macroeconomic and the Macroprudential tools which help in defining the macroeconomic policy especially the monetary policy of the country.

Many researchers in the past have explained the fact that help in understanding the Macroprudential policy, the targets, objectives, instruments and the transmission mechanism. The Macroprudentialpolicy is therefore directly related to the monetary policy of any country and its central banks. Macroprudential policy received recognition in the early 2000, where the term became common in the existing financial system (Charap, J., 2011). However, in the recent past or the past five years, Macroprudential policy have been a topic of discussion which has helped in overcoming the domestic financial system pitfalls and has also helped in reducing the extremes in the capital market and its credit cycle (Claessens S, 2012).

Objectives of Macroprudential Policy

The basic objective of macro prudential policy is to overall increase the resilience of the domestic financial system that can counter the instability within the domestic financial system which arises from the credit, liquidity shocks and the asset price. The instruments that are designed for marcoprudential policy are established to provide the additional buffers to the overall financial system that can vary with the macro credit cycle. It also helps in reducing the extremes in the credit cycle and the capital market flows also. These instruments have played an effective and efficient secondary role in stabilizing the macro economy. Therefore, the reserve banks now consider all the interaction with the monetary policy setting when implementing Macroprudential policy (Claessens S, 2012................

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