Typical building blocks of safety nets include emergency liquidity assistance, deposit protection schemes and exit policies. As highlighted by experience over the last twenty years or so, illdesigned safety nets can be a significant cause of financial instability if they fail adequately to counteract the loss of market discipline that they induce (the “moral hazard” problem).
1 A macroprudential approach firstly, has a time dimension which deals with how risk evolves over time, with procyclicality as the primary source of risk. Secondly, it has a cross-sectional dimension dealing with how risk is allocated within the financial system at a given point in time, with common exposures and inter-linkages between financial firms as the primary sources of risk.