A policy instrument that a regulatory authority deploys and applies in relation to a single regulated entity or market participant. For example, microprudential instruments may impose exposure limits to a single counterparty and certain liquidity ratios, such as the liquidity coverage ratio (LCR), that set a cap on concentration in specific instruments, e.g., wholesale funding, and promote the use of more liquid instruments.
By nature, such instruments are used to address various types of idiosyncratic risks. Liquidity coverage ratio (LCR) is observed as a means to strengthen the liquidity position of individual banks.
Microprudential instruments are applied to ensure the financial soundness of individuals institution. However, a regulator’s focus on its obligation for systemically important institutions, imposing additional capital (capital surcharge) on such institutions, is tantamount to a macroprudential measure since it aims to curb the risks to the financial system as a whole by improving the ability of certain, systematically important institutions to survive pervasive shocks.
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