Answer to Question #295599 in Macroeconomics for hada

Question

What is the macro prudential tools? Explain by giving three (3) appropriate examples

Answer 1

leverage cap is a tool in macroprudential that involves the limitation of assets for example trying bank assets to their equity.

Countercyclical capital to prevent the shrinkage of the balance sheet leading to problems with the bank.

Levy on the liabilities that are not core-to control price distortions which causes excessive assets growth.

Macroprudential tools are financial policies aimed at ensuring the overall stability of the financial system in order to prevent severe disruptions in lending and other vital financial services required for long-term economic growth. The financial system's stability is compromised when financial vulnerabilities are high, such as when institutions and investors have excessive leverage and are overly reliant on uninsured short-term loans, and linkages are convoluted and opaque.