Macroprudential Policy is a process of defining conditions causing financial unease and devising procedures to mitigate to resulting eruption. Evaluation is conducted through macroeconomic market tests. Macroprudential procedures employ reasonability analysis, ratio scrutiny, capital adequacy, profit breakdown, liquidity examination, management performance inquiry to study the health of an institution. Further GDP emergence, inflation, interest rates, forex ontogeny are also put to test.
Macroprudential policies are essentially designed to cope with leverage and liquidity mismatches through systematic risk management. Monetary policy deals with stabalising the credit bubble and macroprudential policy is concerned with the financial system as a whole. So this implies that in the macroprudential policy spectrum credit policy also finds it's place.
Many technocrats believe that macro prudential procedures is a new term used for the same old purpose i.e system management; in which the central banks are involved through out their history. Rather this term has evolved over the past 15 years for the purpose of 'express renewed emphasis' and this emphasis was indispensable for a variety of reasons. Firstly over the last 15 years it became clear that even if the commercial banks are performing up to the task, the system can still be stunned by financial shocks as observed during the Asia 97 Crisis. Secondly, the central banks have understood that system stability is co related with monetary permanence.
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