_policy_ refers to measures to redress threats to financial stability.<sup>2</sup> Macroprudential oversight takes a holistic perspective by focusing on the financial system, rather than on the safety and soundness of individual financial entities. It aims to preserve financial stability by preventing the buildup of systemic risk and containing shocks to the financial sector and the real economy as a whole. Table 2.1, adapted from Borio (2003), compares the micro and macro perspectives on financial sector oversight.

**Table 2.1. Macroprudential and Microprudential Perspectives on Financial Regulation**

||**Macroprudential perspective**|**Microprudential perspective**|
|---|---|---|
|**Proximate objective**<br>**Ultimate objective**|Limit financial system-wide distress<br>Avoid output (GDP) costs|Limit distress of individual<br>institutions<br>Consumer (investor/depositor)<br>protection|
|**Model of risk**|Endogenous|Exogenous|
|**Correlations and common**|Important|Irrelevant|
|**exposures across institutions**|||
|**Calibration of prudential controls**|In terms of systemwide distress;<br>top-down|In terms of risks of individual<br>institutions;bottom-up|

_Source:_ Borio 2003.

Many countries have taken an active interest in macroprudential oversight. Since the global financial crisis, there has been a surge in analytical work aimed at assessing systemic risk, often undertaken by dedicated financial stability departments of central banks. In addition, many countries are introducing new policies and regulations aimed at containing systemic risk, including through capital surcharges for systemically important banks, and countercyclical capital buffers aimed at mitigating the financial cycle. In addition, several countries have established institutional frameworks for the purpose of macroprudential policymaking. As an illustration, the United States has established the Financial Stability Oversight Council (FSOC), which is the key body responsible for macroprudential surveillance. With the establishment of the European Systemic Risk Board (ESRB) within the European System of Financial Supervision, a policy framework was put in place for macroprudential policy at the European Union level, to be exercised through warnings and recommendations.

To effectively mitigate systemic risk, it is necessary to somehow monitor it, which remains challenging. Risks to financial stability are not easily measurable, and several authors have referred to the “fuzziness” of measuring systemic risk (Borio and Drehmann 2009). Academic research has typically focused on measuring particular aspects of systemic risk, and less so on developing an overarching analytical framework for macroprudential analysis (see Box 2.1). As a

> 2 Based on a survey conducted in 2011, the IMF identified 10 macroprudential instruments that are most frequently used. The instruments can be loosely classified into the following three categories: (i) _credit-related measures_ (caps and ceilings on (a) the loan-to-value (LTV) ratio, (b) the debt-to-income (DTI) ratio, and (c) foreign currency lending, and (d) aggregate credit to particular sectors or categories of debtors); (ii) _liquidity-related_ , (limits on net open currency positions and/or currency mismatch (NOP), and limits on maturity mismatch and reserve requirements); and (iii) _capital-related_ (countercyclical capital requirements and dynamic provisioning).

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