If the financial cycle becomes large in magnitude or many financial institutions become more interconnected by increasing common exposure or forming mutual asset-liability arrangements, systemic risk will emerge and spread within the financial system. The objective of macroprudential policy is to strengthen the resilience of the financial system and contain systemic risk.
In order to implement macroprudential policy, we first need to assess systemic risk. Specifically, the assessment is composed of two main parts. The first is to assess the financial cycle. We examine whether the current conditions are in an expansion phase or a contraction phase of the cycle, considering the outlook.