Regulators worry that the “macroprudential” regulation enacted since the financial crisis to protect financial stability may be inadequate to prevent another crisis. This paper examines that regulation with a decade of hindsight.
The primary focus of that regulation has been to protect against the failure of systemically important financial institutions (“SIFIs”) or to mitigate the systemic impact of their failure. This reflects concern that SIFIs may engage in morally hazardous risk-taking because they deem themselves “too big to fail” (TBTF). For example, capital requirements are intended to protect against the failure of SIFIs by requiring them to maintain specified levels of equity and the like. Resolution is intended to mitigate the systemic impact of a SIFI’s failure by reorganizing its capital structure or liquidating it with minimal systemic impact.