By Charles Goodhart and Dirk Schoenmaker
The recent de Larosière report on financial supervision and stability in the European Union should be praised for its rigorous assessment of the shortcomings of the current, mainly national-based regulatory system. It also makes some recommendations to resolve these shortcomings.
First, the report recommends the introduction of macro-prudential supervision. The financial crisis has illustrated that the micro-focus of supervisors on individual institutions does not suffice. This micro-focus
should be supplemented by a macro-approach to detect the development of imbalances in the financial system, such as excessive capital growth.