Question

What is the purpose of "macro-prudential" regulation? Give three examples of how the Dodd-Frank Act promotes this. Do you think they will be successful? Why or why not?

Answer 1

The goal of macroprudential supervision and regulation is to reduce the risk of financial disruption which is sufficiently serious to cause significant damage to the wider economy. The structural orientation of the macroprudential approach can be contrasted with that of the conventional, or "microprudential," regulatory and supervisory approach, which is mainly concerned with the protection and soundness of individual institutions, markets or infrastructures.

The recent financial crisis has exposed crucial flaws and vulnerabilities in the US financial system and the mechanism for financial regulation. Congress and the administration received a roadmap in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) to fix many of these concerns.

The regulatory agencies represented on the council regulate a large number of U.S. financial sector participants. The Council's broad composition is intended to restrict regulators' propensity to concentrate narrowly on the entities and markets within their jurisdictions while ignoring the risks of interdependencies that overlap across jurisdictions. The Board also encourages collaboration and sharing of information among member agencies. The council will help recognize and remove the gaps and vulnerabilities within the regulatory system by breaking down the silos that in the past often prevented agencies from looking beyond their particular responsibilities.

The Dodd-Frank Act has created the Office of Financial Reporting, within the Treasury Department, which is responsible for enhancing the quality of the financial data available to policymakers. The supervisory board can guide the research office to gather information from certain financial firms in order to assess risks to the financial system. This financial-sector data collection and analysis will allow regulators to see more of the financial environment and better prepare them to recognize structural risks and other emerging threats.