Systemic risk, macroprudential policy frameworks, monitoring financial systems and the evolution of capital adequacy

This paper analyses various issues that need to be tackled when promoting financial stability, reviewing the progress made in certain key areas and the remaining challenges. It explores the measurement of systemic risk and of individual institutions' contribution to it. It discusses aspects of macroprudential frameworks, including how the countercyclical capital buffer envisaged in Basel III takes into account the properties of the financial cycle and the strengths and weaknesses of macro-stress tests. It analyses some of the challenges of how best to monitor financial systems and the broader economy in order to detect signs of vulnerability that might lead to future bouts of financial instability and of how to set prudential policy accordingly. And it discusses the evolution of capital adequacy standards and the new emphasis on liquidity standards in international regulation.

► The paper shows factors that contribute to systemic risk of financial institutions. ► We highlight how to improve the policies that contribute to financial stability. ► We demonstrate how the financial cycle could influence financial stability. ► Empirical results show the role of capital to a more resilient financial system.