‘?A need for a clear legal distinction between micro- and macroprudential regulation in the UK’

Abstract

The financial crises revealed the shortcomings of the existing financial regulatory framework in monitoring the risky activities of financial sectors. Prior to the 2008 financial crisis, financial regulators aimed to secure the stability of individual banks and insurance companies to avert their failure. Following the collapse triggered by mortgage-backed securities and derivatives in 2008, however, lawmakers and scholars began to recognise that the prevailing "microprudential" regulatory approach overlooked crucial connections within the financial system. Consequently, a new strategy termed "macroprudential" regulation emerged as a supplementary framework more adept at addressing risks within contemporary financial markets. While microprudential regulation concentrates on the financial soundness of single institutions, macroprudential regulation seeks to protect the entire financial system by tackling vulnerabilities on a broader scale. Since the Financial Crisis, prudential regulation has been often categorised into two dimensions: micro-prudential and macro-prudential regulation. It has been claimed also that the UK's macroprudential supervisor is "the most muscular macroprudential regulator in the world." Emphasizing the significance of macroprudential policies does not imply that microprudential objectives should be disregarded as both types of policies are essential for achieving financial stability. Therefore, this essay explores how the UK institutional framework establishes a regulatory architecture to implement both micro and macroprudential policies. It highlights that the UK's institutional framework separates micro- and macroprudential policies by establishing specific entities responsible for each policy and creating coordination mechanisms to minimise conflicts and avoid working in silos, with macroprudential objectives taking precedence over microprudential ones in case of conflicts through a hierarchical model. The essay concludes that the institutional arrangement is meticulously planned and effectively designed, foster strong collaboration between micro- and macroprudential dimensions. However, when agreements cannot be reached, protecting macroprudential objectives takes priority, which can be justified as the failure to protect the financial system as whole can be very costly.