Macroprudential Analysis: Meaning and Conduct

What Is Macroprudential Analysis?

Macroprudential analysis evaluates the health, soundness, and vulnerabilities of a financial system.

Key Takeaways

• Macroprudential analysis identifies systemic risks in a financial system.
• This analysis considers macroeconomic data such as GDP growth, inflation, interest rates, exchange rates, asset prices, etc.
• It examines the interconnectedness of financial system participants and how risks can be transmitted through financial linkages.

Understanding Macroprudential Analysis

Macroprudential analysis evaluates the health of financial institutions, conducts stress tests and scenario analysis to gauge the system’s sensitivity to economic shocks. It also reviews macroeconomic and market data to determine the current system’s health. Qualitative data related to financial institutions’ frameworks and the regulatory environment provide additional insight into the system’s strength and vulnerabilities.

When assessing the health of financial institutions, macroprudential analysis uses indicators that provide data on capital adequacy, asset quality, management performance, profitability, liquidity, and sensitivity to systematic risks.

Macroeconomic data used include gross domestic product (GDP) growth, inflation, interest rates, balance of payments, exchange rates, asset prices, and market correlations.

Scenario analysis and stress tests are major components of this analysis. For example, it examines how the system would cope with a declining currency value and its impact on GDP, interest rates, and profitability.

Lastly, macroprudential analysis looks at credit ratings, yields, and market prices of financial instruments.

Purpose of Macroprudential Analysis

Macroprudential analysis identifies systemic risks well in advance to prevent financial crises and mitigate their macroeconomic impact. It analyzes credit cycles, structural features, vulnerabilities of the financial system, and problems of specific institutions. Continuous development of the macroprudential toolkit is necessary for effective risk identification.

In addition to risk identification, macroprudential analysis assesses the resilience of financial institutions and market infrastructures to severe disruptions. It also evaluates the interconnectedness of financial system participants and their resilience against transmitted risks.

Conducting Macroprudential Analyses

Financial institutions typically collaborate to conduct comprehensive macroprudential analyses. For example, the Bank of Finland works closely with the Finnish Financial Supervisory Authority and the Ministry of Finance to analyze macroprudential risks and establish interlinkages between the real economy and financial markets. The bank has extensive experience and expertise in this research area and cooperates with various financial authorities, including the European Systemic Risk Board (ESRB).