Financial instability and macro-prudential supervision

Financial liberalisation and deregulation have increased financial instability and crises. While the importance of fundamental weaknesses has decreased over time, the impact of the deregulation of the financial and, especially, the banking system has become preponderant. This paper examines the dynamics of the main factors of vulnerability interacting with the financial system and concludes that, in order to prevent financial excesses and systemic malfunction leading to crises, both the preservation of macroeconomic balances and the adoption of a more efficient regulatory/supervisory framework are needed. The latter would be greatly improved by the adoption of a system-wide vision of financial instability and an inter-temporal assessment of the financial risk, in the context of a still-emerging new approach, primarily within the Bank for International Settlements.