Despites improvement in the resilience of the
U.S. financial system, there are challenges that still exist. Firstly, new
regulations may lead to changes in the institutional position of certain
financial activities, which can possibly counterbalance the awaited effects of
the regulatory reforms. Changes in regulation have emphasized significantly on
large banks, since it is the most interrelated and compound institutions. However,
potential change of activity from more regulated to less regulated institutions
could contribute to new threats. For example,
there have been observation of reduced liquidity in fixed-income markets. Observers
have related this disturbance to new regulations that have increased the costs
of market making. Moreover, the relocating of activities in response to
regulation is a possible impairment to the success of macroprudential policy.

Secondly, macroprudential
policy in the U.S. faces limitations in cyclical buildup of financial stability.
Since the crisis, there have been development to position some countercyclical tools
to prevent systematic risk, such as the “analysis of salient risks in annual
stress tests for banks, the Basel III countercyclical capital buffer, and the
Financial Stability Board (FSB) proposal for minimum margins on securities
financing transactions”. However, the proposal of the Financial Stability Board
(FSB) is yet to be enforced, and many instruments used in other nations are
either unavailable to U.S. authorities or are far from being implemented. For
instance, new instruments, such as the countercyclical capital buffer, remains
untested in the United States.

Thirdly, financial stability issues
are difficult to measure in practice. It may be difficult to distinguish between
efficient and inefficient market arising from market failures or externalities.
As a result, it can be difficult to know when macroprudential policies need to
be hired, loosened, or tightened. Designing macroprudential policies involves defining
how huge a buffer should be made up in periods of financial stability and when
and how much it can be released freely during financial distress. Due to
limited experience, regulators may misjudge the outcome of macroprudential
policies on productivity, which may give rise to policy errors. For example,
regulators may misjudge the level to which reserve requirements reduce total
demand and inflation, and as a result may select too little interest rate


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