Macroprudential policy refers to actions by authorities the primary and explicit objective of which is to promote the stability of the financial system as a whole. Thus macroprudential policy complements both monetary policy – the primary objective of which, within monetary union, is to safeguard price stability – and financial supervision, which is aimed at ensuring the stability of individual financial institutions and the financial market infrastructure.
The purpose of macroprudential policy is to lower the probability of financial crises and limit their impacts on the financial system and macroeconomy. By studying previous financial crises and the developments that have led to them, it has been possible to identify certain cyclical phenomena that have been the cause of many financial crises. These phenomena are, e.g., exceptionally rapid growth in lending and indebtedness, housing and other asset price bubbles, and rapid increases in financial institutions' short-term market-based funding. The probability and severity of a financial crisis depends also on the structure of the national banking and financial system, e.g. the size of the major individual financial institutions or the banking sector relative to the size of the economy or the interconnectedness of the financial institutions.
Macroprudential instruments can be used to reduce both cyclical and structural systemic risks. Macroprudential instruments suitable for reducing cyclical systemic risks are, e.g., the countercyclical capital buffer requirement and the maximum loan-to-value ratio for housing loans (loan cap). Structural systemic risks can be reduced by imposing additional capital requirements on systemically important financial institutions.
In Finland, decisions on the use of macroprudential instruments are taken by the Board of the Financial Supervisory Authority. The Bank of Finland, the Ministry of Finance and the Ministry of Social Affairs and Health each appoint one member of the Board. The Board also has two members who are independent of authorities and the financial sector. The Bank of Finland also participates, together with the Financial Supervisory Authority and the Ministry of Finance, in the preparation of decisions on the use of macroprudential instruments. Besides the other authorities, the Bank of Finland has the right to be heard as decisions are taken on the adoption of certain macroprudential instruments and to propose discussion of the instruments by the Board of the Financial Supervisory Authority, in addition to the regular quarterly discussions.
In the integrated European financial system, the problems of financial institutions and financial market disruptions can spread rapidly across countries and financial institutions. The task of the European Systemic Risk Board (ESRB), composed mainly of representatives of European central banks and financial supervisors, is to identify cross-border systemic risks and issue to the authorities of the member states macroprudential policy recommendations and warnings. The Governor of the Bank of Finland is a member of the General Board of the European Systemic Risk Board. Bank of Finland experts participate extensively in the preparation of issues discussed in the European Systemic Risk Board.
In the field of macroprudential policy, the Bank of Finland also cooperates with Nordic and Baltic authorities and the European Central Bank. Cooperation with neighbouring countries is essential because of the deep integration of the countries' financial systems. The European Central Bank has certain restricted powers to influence the macroprudential policies of the countries that participate in Banking Union.