8 The existing evidence also suggests that well-designed macroprudential policies may strengthen the financial system. For this to be the case, regulation should generate the right incentives for financial intermediaries so that the system becomes less prone to crises. A commendable basic principle is to use few instruments, and if possible, according to simple rules.
Rules are preferable to discretion, as they lessen the risk of time inconsistency arising from the regulator’s information limits, bank resistance, and other pressures. Three examples of rules follow.