In contrast, m icroprudential supervision and regulation focus on the safety and soundness of individual financial institutions, not the financial system as whole. Higher capital charges r educe the likelihood that a G-SIB would fail because they will have thicker capital cushions to absorb losses. The G-SIB capital surcharge is based on five types of characteristics viewed to increase a bank’s systemic risk: size, complexity, interconnectedness, lack of substitutes, and cross-jurisdictional activity. One example of a macroprudential policy is the higher capital charge applied to Global Systemically Important Banks (G-SIBs), ba nks that pose more risk to the system. M acroprudential policies aim to reduce the financial system’s sensitivity to shocks by limiting the buildup of financial vulnerabilities. H i gh vulnerabilities increase the likelihood that a firm’s failure or other negative shock would cause distress at other financial institutions because of direct exposures and through fire sales, contagion, or other negative externalities arising from the initial shock. The stability of the financial system is at greater risk when financial vulnerabilities a re high, such as when institutions and investors have high leverage and are overly reliant on uninsured short-term funding, and interconnections are complex and opaque. Macroprudential policies are financial policies aimed at ensuring the stability of the financial system as a whole to prevent substantial disruptions in credit and other vital financial services necessary for stable economic growth. What are macroprudential policies? And how do they differ from microprudential policies? ” This primer explains what macroprudential policies are and why they are important now, examples of how they have been used, and evidence o f their effectiveness. To reduce the risks of a repeat of the global financial crisis of 2007-09 - which revealed the inadequacy of the capital, liquidity, and transparency of banks and other big financial firms - governments around the world have embraced “macroprudential policies” to supplement traditional “microprudential policies.
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