The Concept of Macro-Prudential Policy
“Macro prudential” comes from the Greek word macros meaning “large” and the Latin word prudentia meaning “prudence”. The prefix "macro" means these rules or actions are about the whole financial system, not just one institution. "Prudence" is like being careful and thinking ahead, and consequently. Prudential policies are about doing things that are reasonable and not taking too much risk. So, macro prudential policy is there to make sure everyone in the financial system is careful about risks that could affect the entire system.
The aim of macro prudential policy is ensuring the stability of financial system as a whole, in order to prevent substantial disruptions in credit and key financial services necessary for stable economic growth. This includes reinforcing the resilience of the financial system and limiting the emergence of risks and impact of shocks that could have widespread effects, all with the overarching objective of ensuring a sustained and positive impact on economic growth.
In a practical sense, macro prudential policy involves using a range of tools to enhance the stability or boost the resilience of the financial system.
In general, macro prudential policy covers systemic risk monitoring, analysis and assessment, as well as it involves the selection and application of macro prudential tools needed for mitigating or neutralizing these risks, all with the goal of making the financial system more stable.