An instrument or tool that is deployed and applied by a central bank (regulatory authority) with the aim to increase the financial system’s resilience to shocks by addressing a set of systemic risks that may impact the banking sector as a whole. Policy instruments may relate to the macroprudential as well as the microprudential level (collectively known as MPI, macroprudential and microprudential instruments).

Macroprudential instruments include the broad categories of capital-based measures, liquidity-based measures, borrower-based measures, among others. Within each category, there are certain subcategories such as capital requirements regulations (e.g., risk weights, capital conservative buffers, etc.) and directives (e.g., countercyclical capital buffers, systemic risk buffers), and specific financial ratios (e.g., leverage ratio), all within capital-based measures. Liquidity-based measures, as part of capital requirement regulations, may include liquidity requirements, large exposure limits, etc. Other instruments within the category of liquidity-based measures are LTD ratio caps, non-stable funding levy, etc.

Similarly, a microprudential instrument is one 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.

Macroprudential instruments cannot be used without involving microprudential instruments, as the two classes of instruments complement each other.