But safeguarding ﬁnancial stability requires a complementary, macroprudential perspective. The ﬁnancial system is highly interconnected, shocks to large ﬁnancial institutions may affect the stability of the system, and common exposures to macroeconomic risks matter. All of this creates systemic risk externalities.
Even if all ﬁnancial institutions properly manage their risks and behave prudently, ampliﬁcation and contagion effects may threaten the stability of the system as a whole. This is why one should not fall victim to the “fallacy of composition”: The resilience of individual institutions is a necessary, but not a suﬃcient condition to ensure the resilience of the ﬁnancial system.