Administrators would be responsible for the development of early warning systems of financial distress, such as a composite index of leading indicators. Finally, macroprudential policy administrators would also be able to provide advice to other regulatory agencies on matters related to financial stability. This report begins by briefly summarizing how recent innovations in finance, while increasing the capacity to borrow and lend, also resulted in a large volume of banking transactions occurring outside of traditional banking institutions. Monitoring these institutions for safety and soundness, which is referred to as microprudential oversight, does not directly address the challenges posed by systemic risk. Hence, the benefits and limitations of macroprudential policy will be discussed. The intermediation transaction carries a variety of risks. 4173 , the Wall Street Reform and Consumer Protection Act of 2009 (Representative Barney Frank), proposes to establish a Financial Services Oversight Council (FSOC), which would consist of the heads of the federal financial regulatory agencies, to provide macroprudential oversight of the U.S. financial system. H.R.
Recent innovations in finance, while increasing the capacity to borrow and lend, resulted in a large volume of banking transactions occurring outside of traditional banking institutions. Also, even though existing regulators supervise individual banks for safety and soundness, there are risks that do not reside with those institutions but may still adversely affect the banking system as a whole. Macroprudential policy refers to a variety of tasks designed to defend the broad financial system against threats to its stability. Responsibilities include monitoring the system for systemic risk vulnerabilities; developing early warning systems of financial distress; conducting stress-testing exercises; and advising other regulatory agencies on matters related to financial stability. H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009 (Representative Barney Frank), establishes a Financial Services Oversight Council with macroprudential regulatory responsibilities. On March 22, 2010, the Senate Banking Committee ordered reported the Restoring American Financial Stability Act of 2010 (Senator Christopher Dodd), which also would establish a Financial Services Oversight Council with similar responsibilities.
This report provides background and discusses the potential benefits and limitations of macroprudential policy efforts. This report will be updated as events warrant.