It was only after the recent crisis that the authorities came to realize that network systemic risks expand as interconnectedness among banks intensifies. The addition in Basel III of macroprudential overlays – such as countercyclical capital buffers, forward-looking provisioning, and systemic surcharges for SIFIs – is based on the repentance of the previous microprudential surveillance framework.
Broadly speaking, the core principles governing financial stability can be thought of in terms of a financial system’s ability to facilitate efficient allocation of economic resources; its effectiveness in assessing, pricing, and managing financial risks; and in maintaining its capability to perform these key functions even when affected by external shocks.