And a supervisor would hardly recommend not to tighten lending standards at an individual bank for fear that the end-result at system level would be a further deterioration in the credit quality of portfolios. Most likely, the comparatively greater micro-prudential focus of supervisors reflects in no small measure depositor (“consumer”) protection objectives.
Indeed, it is common for this objective to be enshrined in their statutes. In addition, it may result in part from an understandable tendency to map tools, which necessarily operate on individual institutions, into goals. But, as I shall argue shortly, neither of these two conclusions is inevitable.