The 2007/08 global financial crisis highlighted shortcomings of the current regulatory framework, specifically its inability to address systemic risk and the stability of the financial system as a whole. Systemic risk is the risk that the financial system becomes impaired with widespread disruptions to the provision of necessary financial services that may seriously damage the real economy. While the health of individual financial institutions – the subject of micro-prudential regulation – is a necessary condition for a sound financial system it is not sufficient due to the complexity of the financial system and interconnection of financial institutions. The focus on individual institutions needs to be complemented by a system-wide perspective. In particular, micro-prudential regulation should be supplemented with macro-prudential policies aimed at calming booms and softening busts and preventing systemic events from occurring and mitigating the adverse effects of such events on financial stability while increasing the resilience and robustness of the system as a whole.
Because current and proposed prudential regulation and supervision has and will have a material impact on the performance, governance and decision-making of financial institutions, the objective of this workshop is to provide practical preparation guidance to market practitioners. Policy instruments, key monitoring tools and techniques and governance arrangements of an effective system of prudential supervision will be discussed. Both micro-prudential policy, which focuses on the health of individual financial institutions, and macro-prudential policy, which addresses risks to the financial system as a whole will be described.