By contrast, the costs of various macro prudential policy measures will be readily felt. Since a tightening of macro prudential policy is likely to reduce the profitability of financial firms, one would expect on occasion strong reactions from the financial sector when macro prudential policy is tightened.
First, we have seen that over-exposure to sovereign risk can undermine banks’ financial health and business viability in times when sovereign credit risk surges. This clearly advocates finding ways in which regulation can discourage overextension by banks to sovereign risk, but I would say country risk more generally, with a view to moderating concentration risk on banks’ balance sheets.