Macroprudential Surveillance Framework

Surveillance of the soundness of the financial sector as a whole—which is macropruden­tial surveillance—complements the surveillance of individual financial institutions by supervisors—which is microprudential surveillance. Macroprudential surveillance derives from the need to identify risks to the stability of the system as a whole, resulting from the collective effect of the activities of many institutions.

Macroprudential analysis also closely complements and reinforces EWSs and other analytical tools for monitoring vulnerabilities and preventing crises. EWSs traditionally focus on vulnerabilities in the external position while using macroeconomic indicators as key explanatory variables. Macroprudential analysis (analysis of FSIs and stress test­ing) focuses on vulnerabilities in domestic financial systems arising from macroeconomic shocks, whose likelihood and severity can be judged from EWSs. At the same time, infor­mation from macroprudential analysis can provide input into assessing macroeconomic vulnerabilities. Analysis of FSIs for individual banks, along with other supervisory infor­mation, serves as a form of EWS for the financial condition of individual banks in many supervisory assessment systems (Sahajwala and Van den Berg 2000).

Macroprudential surveillance uses a combination of qualitative and quantitative meth­ods. The key qualitative methods focus on the quality of the legal, judicial, and regulatory framework, as well as governance practices in the financial sector and its supervision. An important part of the qualitative information is often gathered through the assessments of internationally accepted standards and codes of best practice. The quantitative methods include a combination of statistical indicators and techniques designed to summarize the soundness and resilience of the financial system.

The two key quantitative tools of macroprudential surveillance are the analysis of FSIs and stress testing. The analysis of FSIs includes assessing their variation over time

and among peer groups, as well as assessing their determinants. FSIs help to assess the vulnerability of the financial sector to shocks. Stress testing assesses the vulnerability of a financial system to exceptional but plausible events by providing an estimate of how the value of each financial institution’s portfolio will change when there are large changes to some of its risk factors (such as asset prices).

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