The global financial crisis brought on the realization that supervisory and regulatory frameworks lacked a “macro” dimension. Before the financial crisis of 2007-2011, regulators paid insufficient attention to the accumulation of risk at the level of the financial system as a whole, as opposed to individual financial institutions. Macroprudential oversight, focusing on systemic risk, is meant to fill this gap. It adopts a holistic perspective by focusing on the interactions between the components of the financial system.
Systemic risk is typically defined as the risk of disruption to financial services that is caused by an impairment of all or parts of the financial system, and that has the potential to have serious negative consequences for the real economy (IMF, BIS, FSB (2009)). Macroprudential oversight encompasses an analytical component that is aimed at detecting systemic risk, and a policy component aimed at mitigating it. Effective and timely mitigation of systemic risk starts with a rigorous analysis that informs policymakers when and where the most pressing risks to financial stability are building, and how to act on them.