Economic ResearchPublicationsResearch PapersBanking MarketsMacroprudential supervision: Hand-in-hand with long-term investors

Macroprudential supervision: Hand-in-hand with long-term investors

Service & Contacts

Dr. Lorenz Weimann

Allianz SE
Phone +49.69.24431-3737
Fax +49.69.24431-6791

Send email

Receive the latest Allianz news and information about upcoming events.

Newsletter

Follow Economic Research on Twitter

More

  • Contact

  • Newsletter

  • Social Media

The concept of macroprudential supervision and regulation has progressed in leaps and bounds in recent years: once nothing more than a piece of obscure specialist knowledge coveted by certain regulators, the idea has now become a much vaunted miracle cure that promises to ensure stability on the financial markets. Even the World Economic Forum has addressed the issue, publishing a short paper on the role of macroprudential supervision.

Allianz SE
Munich, Oct 06, 2015

This is hardly a surprising development. As monetary policy continues to flood the financial markets with liquidity, a trend that is expected to continue, at least in Europe and Japan, for the foreseeable future, concerns about the possible "side effects" of this policy are mounting across the board: there are growing fears that this cheap money will only sow new seeds of disruption on the markets and create price bubbles. In this sort of situation, macroprudential supervision and regulation, i.e. the targeted, market-wide use of regulatory tools to prevent systemic crisis, would appear to be a welcome deus ex machina. There are calls for a new division of labor: monetary policy would continue to focus on its main task, namely ensuring price stability – something that many monetary policymakers currently interpret as a battle against supposedly imminent deflation – and in the meantime, macroprudential supervision and regulation would tackle the unwelcome collateral damage by preventing bubbles from forming, for example on the bond and real estate markets.


It goes without saying that this sort of division of labor is destined to fail in the long run. The fact remains that not every bubble can be identified in good time and that not all measures will end up having the desired effect: rather, stringent regulations on certain transactions actually have the potential to nudge the business in question into "shadow territory" – a trend that can already be observed to a certain degree. In the long run, it will be impossible to secure financial market stability without monetary policy that gives interest rates the status they deserve as the measure of risk.