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What does the stability of the financial system mean?

Macroprudential supervision is focused on the financial system as an integrated systemic whole. The approach may be limited to the national financial system or to a broader area, such as the EU, or the entire international financial system. Microprudential supervision includes the assessment of risks encountered by individual financial institutions and conditions in the MFI sector as a whole. The main objective is to identify systemic risks that would significantly weaken the real economy and well-being if they were to materialise. Such serious shocks to the financial system may build up for various reasons. Significant imbalances, possibly generated in connection with credit cycles, can unwind and trigger major negative effects on economic growth and wealth. Systemic risks could also arise from the financial system's specific structural features and vulnerabilities that can reinforce the likelihood of risk materialisation or related costs.

Cyclical systemic risks are, for example, excessive growth in credit and private-sector debt and excessively rising asset prices in an economic upswing. Structural systemic risks are more long-term in nature and can originate, for example, in financial institutions' common exposure concentrations or their close interconnectedness. Such interconnections may lead to rapid spillovers of financial shocks within the financial system. Individual financial institutions as such can also pose a structural systemic risk if their importance for the financial system as a whole is highly significant.

In its recommendation on intermediate objectives and instruments of macroprudential policy (ESRB/2013/1) the European Systemic Risk Board has set out a division between cyclical and structural systemic risks as a guide for the practical implementation of macroprudential policy.




17 July 2015

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