Safeguarding financial institutions is aimed at ensuring that they adequately honor their obligations, remain sound and safe in an economy. However, this has proved to be insufficient in contemporary times. There is an increasing demand for a broader approach that entails safeguarding the financial system as a single unit. In this case, the macro-prudential policy comes in handy to protect a whole financial system. The global financial distress has exposed financial institutions such as commercial banks to challenges. For instance, they have been faced with the instability that has undermined the achievement of their respective goals within an economy. Thus, the macro-prudential policy is ideal in ensuring stability and high performance in financial institutions. The paper explores the rationale of macro-prudential policy and some of the challenges that undermine its role in safeguarding a monetary system.
The rationale of the macro-prudential policy
First, some countries experience huge fiscal expenses while channeling funds to rescue banks. In this case, public finances are deeply reduced to the level of collapsing. If this condition is combined with a fast increasing human population and scarcity of resources, it becomes worse. In such a case, countries are forced to borrow, a condition that significantly increases their debt levels and debt service burden 1 . This is a crucial barrier that hinders economic development in a country. Under such conditions, external support is wholly necessary to bring about stability. Therefore, a macro-prudential policy which provides that such a country can seek and acquire help from other economies and world financial institutions comes in handy 2
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. It is a vital policy that would ensure financial stability that is significantly essential for the public good. This presents an ideal condition for economic growth and sustainability in a country.
Secondly, many countries are likely to suffer depression and cataclysmic economic distress that comes with it. A depression is characterized by a falling Gross Domestic Product caused by a range of harmful activities in a country. The conditions occur when stock market crashes, low consumer confidence, high inflation, and reduced manufacturing activities. Due to the increasing population in almost all countries in the world and enhances the scarcity of resources, signs of depressions have become evident. For instance, rising inflation increased unemployment levels, and increased national debts have become a norm in many countries 3 . Therefore, countries need an appropriate regulatory system that can facilitate external support to such economies 4 . The macro-prudential policy comes in handy as a tool that can facilitate support and enhance financial stability in such economies 5 . This would form a robust foundation for economic growth hence curb economic depression.
Thirdly, the development of more insurance firms in many countries in the world has posed a challenge to respective economies that could only be addressed by macro-prudential policy 6 . Insurance typically enhances ideal risk management in an economy. In this case, they are perceived to support sustainable economic growth 7 . Insurance firms also provide funds to real sector companies, banks, and sovereigns. It does this to ensure the uninterrupted provision of services in an economy in case of a risk. However, there are cases when an insurance company may fail to provide funds to ensure continuity in the provision of a critical service. In this case, the cost of the failure would be significantly high, hence spread via wealth effects. In such a case, banks will receive funds since the impact of the failure is significantly high hence financial instability in the economy. The macro-prudential policy would come in handy to ensure external support for banks. This will help reinstate stability in an economy and foster economic growth and development. Therefore, the macro-prudential policy was established with a good reason for ensuring a country gets back to its feet in such occurrences.
Then, macro-prudential policy reinforces stability in countries where the central bank is sluggish. In such cases, the central bank may fail to carry out extensive research, warn, and control money flow to prevent financial instability in an economy. Such instances depict that there is a shortcoming in the macro-economic system 8 . Thus, an appropriate monetary policy, such as micro-prudential is required to correct the issue. It can facilitate supervision cash flow in an economy and detect liquidity risks. In such a case, proper measures can be established to protect the economy from an impending financial crisis 9 . In this case, the economy enjoys a conducive environment for economic growth 10 . As a result, the standard of living in such an economy is significantly improved. Therefore, macro-prudential policy links macroeconomics and financial stability to facilitate and ensure steady economic growth in an economy.
Next, the development of more political, social, and economic challenges facing humanity has caused rampant cases of national debts in countries. These debts could only be addressed if external financial support is provided to such countries. Borrowed amounts are spent on healthcare, education, security, food, and many other aspects of the economy. National debts lead to delayed economic growth and deteriorating levels of living standards. For instance, the prices of essential commodities such as food and pharmaceuticals can escalate to higher levels. Therefore, the macro-prudential policy is needed as an ideal monetary control policy to safeguard countries from the adverse effects of national debts. In this case, external bodies such as the World Bank and other developed economies such as the United States of America comes in handy to provide funds that can be used reinstate financial stability in a country 11 . Therefore, the policy is vital in reinstating stability in economies that are suffering from national debts 12 .
Then, there is a need for economic equality in society today. The disparities in income have been caused by the fact that some countries are exposed to more resources than others. Also, population growth rates which influence the scarcity of resources varies significantly from one country to the other. However, this situation stifles economic growth in some countries. High economic inequality in society depicts a high rate of crime in society. Besides, it also shows that their poor health and high prices of necessary commodities such as food and shelter. A suitable fiscal policy is needed to relieve the economy of the burden. In this case, the macro-prudential policy comes in handy as a measure that can enable regions, society, or country to acquire support that can eliminate the adverse effects of economic inequality. Since people countries have varying population growth rates, exposure to technology and information, natural resources, and climatic conditions, economic inequality will always be there. Thus, the policy is critical in ensuring economic stability and balance in the standards of living among people in the various regions in the world.
Widespread risks associated with technology and advancement in knowledge in the world. Notably, some countries such as the United States, Germany, China, Canada, Japan, South Korea, India, and England are developed if aspects such as technology and information are considered. On the other hand, countries such as Malawi, Uganda, and Mozambique are not well developed. The disparity has led to technological crimes targeting banks and financial institutions. In most cases, culprits have come from countries that are developed in technology and information. Instances of phishing, credit cards, and ATM card fraud are rampant in countries that have not developed well in technology and information. Consequently, massive sums of money have been stolen from banks and financial institutions to the point of even breaking them. There is an increasing need for a fiscal policy that would help safeguard banks and ensure their stability in case of theft of funds done through technology 13 . Therefore, the macro-prudential policy comes in handy as a measure that can be used to enable support in terms of research, information, and finances to enhance financial stability. This will curb such vices and present an ideal environment that can significantly boost economic growth and sustainability in countries that are prone to these vices.
Then, competition in the banking industry has increased to the level of causing instability in some banks and financial institutions. This has also adversely impacted efficiency in banking. Soon after the second war, banks were regulated. Hence, the competition was limited. In the 1980s, competition and deregulations across borders have become a norm in banking. Financial institutions in some regions, countries, and societies have been forced to close their doors. Due to a need to attract and maintain customers, banks and financial institutions have been forced to minimize their profit margins to the point of even incurring losses if slight unexpected expenses or losses occur 14 . Thus, an ideal tool to control the competition and support banks to develop are necessary. The macro-prudential policy comes in handy as a tool that can force banks towards financial stability rather than profit-making. Financial support can be provided to banks and rules set to safeguard them from the adverse effects of competitions. This will enhance financial stability, which will, in turn, lead to economic growth in various economies in the world.
Challenges
Mandate
Macro-prudential policy undermines banking on the mandate in society. First, macro-prudential policy objectives contract with those set by financial institutions in respective regions and societies. The conflict of objectives derails prevents financial institutions from doing their roles and functions to the people. Secondly, a lack of coordination that is caused by the conflict of objectives hinders the delivery of services to people. Therefore, the efficiency levels are adversely affected. Thirdly, people in society have varying financial needs. Thus, the banking industry has to try and meet the needs of the people. The policy comes with is likely to ignore the specific needs of the people. It locks out beliefs, values, and cultures that people in particular localities are used to. In the long-run, banks fail to incorporate these aspects while granting loans, overdrafts, credit, providing consumer finance, and accepting deposits. For example, the policy may require banks and financial institutions to search for yield using a low-interest rate in a particular environment. This would create a state of financial imbalance in the environment 15 . In this case, the needs of people are not adequately met by the bank but are instead worsened 16 . Therefore, the macro-prudential policy causes banks and financial institutions to fail in playing their mandate in society.
Decision making
Macro-prudential policy hinders effective decision making in the banking sector. First, decisions are supposed to made keeping in mind all tools and objectives operating within the banking sector. In this case, exiting tools and goals and those brought in by macro-prudential policy have to be incorporated in decision making. This lengthens the decision-making process since the committees responsible are supposed to think over all the tools and objectives. Secondly, banks and financial institutions are likely to strain to learn about the needs of customers and incorporate them into decision making. Macro-prudential emphasizes the equal treatment of all clients. Thus, it does not provide mechanisms where clients can present their ideas. Decisions are made and enforced on banks and financial institutions. On the other hand, clients expect contextual, situation-based, and individualized offers these facilities. Therefore, banks and institutions find it challenging to make decisions that do not address the needs of the people.
Tools
Tools of macro-prudential policy can be complicated, and complex hence may hinder operation banking. Local tools in financial institutions are customized to the needs of clients in these localities and operation of respective banking institutions. Thus, the introduction of a new tool by macro-prudential policy adversely distorts the market exposing it to a wide range of financial risks. For example, a provision concerning lowered tax rates could easily low revenue collection, impacting financial stability in respective banks and financial institutions 17 . In some cases, the macro-prudential policy tool could not effectively regulate arbitrage in developed economies. Uncontrolled buying and selling of securities cause financial instabilities in developed a situation that adversely impact economic growth.
Accountability
The macro-prudential policy presents a new set of tools and objectives that significantly undermines accountability in banks and financial institutions. The central banks, commercial banks, and other financial institutions can find it challenging to uphold tools at their disposal effectively. For instance, if they apply federal funds rates, loan to value ratios, and time-varying capital ratio obligations, they may find it hard to implement other fiscal policies such as macro-prudential policy. If they do, this would significantly impact accountability in their processes. For example, interest rates in banks and financial institutions are determined in a wide range of factors operating within specific regions in the world 18 . The regions may require more taxes as a source of revenue to enhance infrastructure development. The provisions of the macro-prudential policy may require that the interest rate be lowered significantly to a specific percentage 19 . Whereas this may favor some regions that are already developed, it may hinder development in other areas. In such a case, the macro-prudential policy will have a low-interest rate as a tool to make loans and overdrafts accessible and affordable to a majority of people within the locality . However, local banks and financial institutions will have a higher interest rate as a tool to enhance higher revenue but to make profits. This leads to a situation where banks and financial institutions cannot account for it if local monetary policies are to be applied 20 . Therefore, macro-prudential policy significantly hinders accountability in local banks and financial institutions since it presents new tools and objectives that are deferent. This causes friction within respective banking institutions and undermines their ability to achieve their goals and objectives.
Conclusion
The macro-prudential policy is essential in maintaining stability in the financial system. This presents a suitable environment for economic growth. The reason behind this policy is that huge fiscal expenses while rescuing banks, economic depression, the development of more insurance firms. It reinforces stability in countries where the central bank is sluggish and the development of new political, social, and economic challenges. Another reason behind the development of the policy is to ensure equality in society, curb widespread risks associated with technology and advancement in knowledge, competition, and effects of disasters. However, the policy has come with particular challenges impact accountability, mandate, decision making, and the inability to address the root cause of financial instability.
Bibliography
Journals
Howlett M, I MukherjeeJ Woo, 'From Tools To Toolkits In Policy Design Studies: The New Design Orientation Towards Policy Formulation Research' (2015) 43 Policy & Politics. 291-311.
Olivier Butzbach, 'Systemic risk, macro-prudential regulation and organizational diversity in banking' [2017] 35(3) Policy and Society Journal 239-251.
Books
Naoyuki Yoshimo and Farhad Taghizadeh-hesary, ADB Institute Series on Development Economics (Springer 2016) 1-18.
Damodaran Krishnamurti and Yejin Lee, Macroprudential Policy Framework A Practice Guide (Library of Congress 2014) 1-37
Farrokh Langdana, Macroeconomic Policy: Demystifying Monetary and Fiscal Policy (3rd edn, Springer International Publishing 2018) 1-318.
John Keynes, The General Theory of Employment, Interest, and Money (Palgrave Macmillan edn, 2018) 1-402.
Court cases
George J MARCUS and Marcus, Clegg, Bals & Rosenthal, PA, Plaintiffs/Counterclaim Defendants, v ALLIED WORLD INSURANCE COMPANY, Defendant/Counterclaim Plaintiff [2019] 2 DBH 117 (United States District Court, D. Maine.) (D Maine).
ERIC MEYER, Plaintiff, v WORLD BANK; INT'L MONETARY FUND; EUROPEAN CENTRAL BANK, Defendants [2019] 5 GPC-JLB 1 (United States District Court, S.D. California.) (Gonzalo P Curiel).
