Question

What are the disadvantages of a microprudential supervision?

Answer 1

Answer: Microprudential Supervision is defined as process which focuses on limiting risks within intermediaries for reducing the possibility of failure of individual institution's.

After subprime crises 2007-08 forces economists to consider the importance of macroprudential regulations at par with microprudential regulations.

There are various limitations in microprudential supervisions like:

1.As it does not focus on the larger picture i.e. safeguard individual financial institutions from risks and prevent them from taking too much risk.However stability of individual financial institutions alone is not enough to maintain the stability of the whole financial system.

2.Credit booms are not necessarily a source of concern for micro-prudential regulations but in comprehensive manner such cycles of businesses either boom or burst are important indications of long term health of financial system.

3Such credit ised to seen during crisis in 2007-08 and ignorance to this credit boom issue led to overall failure of banking system and led to recession.

Hope it helps!