Macroprudential policy involves regulation and supervision of financial institutions to safeguard stability in the financial system as a whole. The system can become vulnerable to loss contagion even when institutions on an individual basis maintain strong balance sheets. Examples of macroprudential policy instruments include capital and liquidity requirements; limits on credit and leverage; regulation pertaining to borrowers, for example loan-to-value ratios; and special requirements for systemically important financial institutions. Systemic risk tends to build in boom times and subside in busts. These fluctuations tend to be amplified in the Emerging East Asia setting by global capital flows. Macroprudential policy aims at moderating the fluctuations. Analysis is complicated by the diversity of instruments available and the complexity of the regulation involved. Korea’s relatively long history of experience offers opportunity for study.

Choosing the optimum supervisory model to manage financial stability requires a consideration of country-specific preferences based on the level of market development and the configuration of the financial system. The choice of model, its structural design, and the regulatory mandates will influence a supervisor’s effectiveness for managing financial stability. This Chapter analyzes the sectoral models in Mainland China, the United States, and Hong Kong to showcase institutional design elements and variations across different financial systems. The chapter assesses the advantages and disadvantages of the unified central bank and banking supervisory design of the Hong Kong Monetary Authority. Understanding how monetary policies affect banking institutions can be critical for maintaining banking sector stability. A unified structure creates a supervisory synergy when calibrating the lender of last resort and unconventional liquidity tools because coordination tensions are eliminated. The Hong Kong Monetary Authority is compromised because of the Linked Exchange Rate System and the Interest Rate Adjustment Mechanism inhibits its ability to set and control interest rates which can destabilize the banking sector.