This paper, authored by Claudio Borio and published in February 2003, explores the concept of macroprudential frameworks in financial supervision and regulation. The author argues that to enhance safeguards against financial instability, it is desirable to strengthen the macroprudential orientation of current prudential frameworks. The essay defines and contrasts macroprudential and microprudential dimensions, examines the nature of financial instability, and discusses policy efforts to address it. The paper highlights three key reasons for strengthening the macroprudential approach: 1. **High Costs of Financial Instability**: Financial crises can have significant economic costs, including output losses and social strain. 2. **Balance Between Market and Policy-Induced Discipline**: A strict microprudential approach can lead to overly protective regulations, stifling market forces and growth opportunities. 3. **Nature of Financial Instability**: Financial instability often arises from common exposures to macroeconomic risk factors, rather than just individual institution failures. The author suggests that a macroprudential approach should focus on limiting systemic risk and calibrate prudential controls based on the marginal contribution of each institution to overall risk. This approach acknowledges the endogeneity of risk and the role of risk perceptions and incentives in financial instability. In terms of policy responses, the paper discusses the importance of improving risk measurement over time, the implications of the New Basel Capital Accord, the role of longer horizons in stabilizing the system, and the division of labor between accounting and prudential norms. The author concludes that while concrete proposals are challenging, a broader outline of desirable policy efforts is emerging, emphasizing the need for a more comprehensive approach to financial regulation.This paper, authored by Claudio Borio and published in February 2003, explores the concept of macroprudential frameworks in financial supervision and regulation. The author argues that to enhance safeguards against financial instability, it is desirable to strengthen the macroprudential orientation of current prudential frameworks. The essay defines and contrasts macroprudential and microprudential dimensions, examines the nature of financial instability, and discusses policy efforts to address it. The paper highlights three key reasons for strengthening the macroprudential approach: 1. **High Costs of Financial Instability**: Financial crises can have significant economic costs, including output losses and social strain. 2. **Balance Between Market and Policy-Induced Discipline**: A strict microprudential approach can lead to overly protective regulations, stifling market forces and growth opportunities. 3. **Nature of Financial Instability**: Financial instability often arises from common exposures to macroeconomic risk factors, rather than just individual institution failures. The author suggests that a macroprudential approach should focus on limiting systemic risk and calibrate prudential controls based on the marginal contribution of each institution to overall risk. This approach acknowledges the endogeneity of risk and the role of risk perceptions and incentives in financial instability. In terms of policy responses, the paper discusses the importance of improving risk measurement over time, the implications of the New Basel Capital Accord, the role of longer horizons in stabilizing the system, and the division of labor between accounting and prudential norms. The author concludes that while concrete proposals are challenging, a broader outline of desirable policy efforts is emerging, emphasizing the need for a more comprehensive approach to financial regulation.