Indeed, huge risks may emerge from the complex interactions between the individual players and instruments, the institutional framework and the broader macroeconomic environment. Detecting this type of underlying vulnerability requires a “top-down” approach to complement the “bottom-up” supervision of the financial system’s individual components. This is the focus of “macro-prudential supervision” as it is known.
To quote Jose Viñals, who is speaking later this morning, what is needed is “to see both the forest and the trees”. Europe has been the epicentre of the crisis in the past two years.