What is the financial system?

The financial system is made up of three components:

• Financial intermediaries, such as banks, insurers and investment firms
• Financial markets
• Technical infrastructure, such as payment, trading and securities settlement systems. The financial system is ensconced by the legal framework and financial supervision.

There are further relevant elements (eg central banks).

Key elements of the national financial systems are currently very much interconnected across national borders. That is why many often refer to a European or global financial system.

What is a stable financial system?

A stable financial system fulfils its central macroeconomic functions smoothly and at all times. This embraces, in particular, the efficient allocation of financial resources and risks as well as the provision of an efficient and secure financial infrastructure.

What is a stable monetary system?

The global monetary system comprises the framework for monetary transactions between currency areas (eg exchange rate regimes, foreign currency markets) and the institutions that monitor and stabilise the system (eg central banks and the IMF).

Monetary stability refers to the economic, monetary and financial stability of the individual countries and the global monetary system as a whole. One important objective is to avoid or to correct unsustainable current account imbalances. The idea is, through international cooperation and coordination, as well as through the provision of liquidity that can be used across the world if necessary, to avoid abrupt exchange rate adjustments and competitive devaluation which could endanger the growth of world trade and the global economy.

What does macroprudential mean?

The term "macroprudential" denotes oversight of the stability of the financial system as a whole. The supervision of individual banks, by contrast, is referred to as "microprudential" (banking supervision).

What is macroprudential oversight?

Macroprudential oversight encompasses the functions of those supervisory authorities and central banks charged with identifying, assessing and mitigating risks for the financial system as a whole. The relevant authorities can issue warnings regarding risks and unhealthy developments, indicate policy options to avert the danger, and intervene if need be. Macroprudential oversight, with its mandate to influence the entire financial system and the stability thereof, supplements the microprudential oversight of individual banks, insurers and additional participants in the financial system.

The entry into force of the German Financial Stability Act (Finanzstabilitätsgesetz) at the beginning of 2013 gave macroprudential surveillance in Germany a legal basis.

What is macroprudential policy?

Macroprudential policy refers to the fact that the objective is to influence the stability of the financial system as a whole (hence "macro") using regulatory and supervisory tools (this is what is meant by "prudential") – as opposed to microprudential supervision, which deals with individual financial intermediaries (such as banks or insurers). Macroprudential policy instruments are targeted at specific intermediaries, activities or infrastructures.