Despites improvement in the resilience of theU.

S. financial system, there are challenges that still exist. Firstly, newregulations may lead to changes in the institutional position of certainfinancial activities, which can possibly counterbalance the awaited effects ofthe regulatory reforms. Changes in regulation have emphasized significantly onlarge banks, since it is the most interrelated and compound institutions. However,potential change of activity from more regulated to less regulated institutionscould contribute to new threats. For example,there have been observation of reduced liquidity in fixed-income markets.

Observershave related this disturbance to new regulations that have increased the costsof market making. Moreover, the relocating of activities in response toregulation is a possible impairment to the success of macroprudential policy.Secondly, macroprudentialpolicy in the U.S.

faces limitations in cyclical buildup of financial stability.Since the crisis, there have been development to position some countercyclical toolsto prevent systematic risk, such as the “analysis of salient risks in annualstress tests for banks, the Basel III countercyclical capital buffer, and theFinancial Stability Board (FSB) proposal for minimum margins on securitiesfinancing transactions”. However, the proposal of the Financial Stability Board(FSB) is yet to be enforced, and many instruments used in other nations areeither unavailable to U.S. authorities or are far from being implemented. Forinstance, new instruments, such as the countercyclical capital buffer, remainsuntested in the United States.

Thirdly, financial stability issuesare difficult to measure in practice. It may be difficult to distinguish betweenefficient and inefficient market arising from market failures or externalities.As a result, it can be difficult to know when macroprudential policies need tobe hired, loosened, or tightened. Designing macroprudential policies involves defininghow huge a buffer should be made up in periods of financial stability and whenand how much it can be released freely during financial distress.

Due tolimited experience, regulators may misjudge the outcome of macroprudentialpolicies on productivity, which may give rise to policy errors. For example,regulators may misjudge the level to which reserve requirements reduce totaldemand and inflation, and as a result may select too little interest rateresponse.


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