Question

How do regulators use capital requirements when undertaking macroprudential supervision of all the banks in the financial system? Explain.

Answer 1

Macroprudential regulation is the method to financial regulation that focus to reduce risk to the financial system as a whole. In the after-effects of the late-2000s financial crisis, there is a increasing consensus among policymakers and economic researchers about the require to re-orient the normative framework towards a macroprudential perspective.
The main aim of macroprudential regulation is to decrease the risk and the macroeconomic costs of financial instability. It is recognized as a compulsory component to fill the gap between macroeconomic policy and the traditional microprudential regulation of financial institutions.

Use of capital requirements when undertaking the macroprudential supervision :-

Following chart can explains the how regulators use capital requirements when undertaking the macroprudential supervision;

Chart:-