Microprudential Regulation
Microprudential regulation focuses on the safety and soundness of individual financial institutions.
Meaning in Practice
In practice, microprudential supervision assesses the capital adequacy, liquidity position, and risk management of single institutions. Supervisors conduct reviews and stress tests to ensure compliance with prudential standards. The aim is to prevent the failure of individual banks.
Why It Matters
Strong microprudential oversight protects depositors and investors at the institutional level. It reduces the probability of isolated bank failures. This contributes indirectly to overall financial stability.
Market Impact
Stricter supervisory requirements can affect an institution’s lending capacity and profitability. Markets monitor supervisory findings and capital shortfalls closely. Adverse assessments may lead to higher funding costs.
Example
A supervisory authority requires a specific bank to increase its capital after identifying weaknesses in its risk controls during a review process.