Answer to Question #290409 in Macroeconomics for vena

Question

What are the macro prudential tools? Explain by giving three appropriate examples.

Answer 1

Macroprudential tools are financial policies aimed at safeguarding the financial system's overall stability in order to avoid significant interruptions in lending and other critical financial services required for sustained economic growth. Whenever financial risks are high, such as when organizations and investors have excessive leverage and are unduly dependent on uninsured short-term lending, and linkages are complicated and opaque, the monetary system's stability is jeopardized.

Example

1. Loan-to-value ratio and loan loss provisions capping. Additionally, debt-to-income ratio limit
2. Increased capital charge to banks that pose risks to the systems
3. Countercyclical capital standard is in place to minimize excessive balance-sheet reduction from troubled banks.