Macroprudential Policy: Rationale and Challenges

The focus of this chapter is on financial stability, not on consumer protection, nor any broader concept referring to economic well-being or welfare. Financial stability is usually defined as a situation when the financial system performs its functions in a continuous and efficient way, even in the case of unexpected and significant shocks or disturbances (Narodowy Bank Polski, 2013, p. 3). Thus, lack of stability or a crisis can be described as a situation when financial system (especially with regard to banks, but also other intermediaries) cannot continue its activity without significant external support. Obviously, the global financial crisis exemplifies this kind of a situation. As a result of the crisis financial institutions and many economies have suffered huge losses. In the EU alone, the public sector was forced to recapitalise banks with an amount corresponding to 2.5% of EU’s GDP (EUR 322 billion) (European Commission, 2012, p. 35). This was necessary in order to avoid the dramatic consequences of the uncontrolled bankruptcies of significant banks, which would have led to a meltdown of the market economy. The cost of this would have been unimaginable. At the same time, the economic breakdown caused by the crisis reduced GDP in the Euro area to a level that was about a dozen percentage points lower than it would have been, if growth had remained at the pre-crisis pace.