Macroprudential Analysis

DEFINITION of 'Macroprudential Analysis'

A method of economic analysis that evaluates the health, soundness and vulnerabilities of a financial system. Macroprudential analysis looks at the health of the underlying financial institutions in the system and performs stress tests and scenario analysis to help determine the system's sensitivity to economic shocks. Macroeconomic and market data are also reviewed to determine the health of the current system. The analysis also focuses on qualitative data related to financial institutions' frameworks and the regulatory environment to get an additional sense of the strength and vulnerabilities in the system.

BREAKING DOWN 'Macroprudential Analysis'

When looking at the health of the underlying financial institutions in the system, macroprudential analysis uses indicators that provide data on the health of these institutions as a whole including capital adequacy, asset quality, management performance, profitability, liquidity and sensitivity to systematic risks. Macroeconomic data used includes gross domestic product (GDP) growth rates, inflation, interest rates, balance of payments, exchange rates, asset prices and the correlation of markets within the system. Finally, macroprudential analysis looks at key components of the financial markets, including prevailing credit ratings and the yields and market prices of financial instruments.

Scenario analysis and stress tests are major component of this analysis. For example, the analysis may look at how the system would cope with a steadily declining currency value and its impact on GDP, interest rates and underlying institution profitability.

RELATED TERMS
  1. Financial System

    A financial system can be defined at the global, regional or ...
  2. Stock Analysis

    Stock analysis is a term that refers to the evaluation of a particular ...
  3. Bank Stress Test

    An analysis conducted under unfavorable economic scenarios which ...
  4. Bilateral Credit Limit

    Intraday credit limits set by two institutions for use with one ...
  5. CAMELS Rating System

    An international bank-rating system where bank supervisory authorities ...
  6. Mixed Economic System

    An economic system that features characteristics of both capitalism ...
Related Articles
  1. Investing

    Inside National Payment Systems

    Investopedia explains: The global interconnection of U.S. payment systems makes commerical and financial transfers possible.
  2. Investing

    Trading Systems: Run With The Herd Or Be A Lone Wolf?

    Find out if taking the path less traveled will work in your favor - or against it.
  3. Financial Advisor

    A Day In The Life Of A System Trader

    Systems traders divide their time between trading, developing, backtesting, optimizing and forward testing, to create viable and high-probability trading systems.
  4. Investing

    Explaining Financial Statement Analysis

    Financial statement analysis is the process of reviewing a company’s statements to gain an understanding of its financial health.
  5. Managing Wealth

    Interpreting A Strategy Performance Report

    These key performance metrics will help you decide if your trading strategy is a winner.
  6. Trading

    How To Start Trading: Testing Your Trading Plan

    An important part of a trading plan is testing to determine what you can expect of its performance. Backtesting and forward performance testing will help you predict if your plan will succeed ...
  7. Managing Wealth

    Business Analyst: Job Description & Average Salary

    Learn the different types of business analyst careers available; understand the skills and education needed and the salary you can expect to make.
  8. Managing Wealth

    An Investor's Guide To Bank Stress-Testing

    Just how are bank stress tests performed and what is the logic behind them? And is a stress test useful for evaluating a bank's stock?
  9. Investing

    Explaining Financial Analysis

    Financial analysis is a general term that refers to using financial data to make business and investment decisions.
  10. Trading

    Trading Systems Coding

    Automate your trades by translating your strategy into a language your computer can implement in this hands-free approach to investing.
RELATED FAQS
  1. Is it better to use fundamental analysis, technical analysis or quantitative analysis ...

    Understand the difference between fundamental, technical and quantitative analysis, and how each measurement helps investors ... Read Answer >>
  2. What is the best method of analysis for forex trading?

    Types Of Analysis Used In ForexForex analysis is used by the retail forex day trader to determine whether to buy or sell ... Read Answer >>
  3. What is the difference between a capitalist system and a free market system?

    Learn about capitalist and free market systems, how these economic systems function and the main difference between capitalism ... Read Answer >>
  4. How is the ability to perform Activities of Daily Living (ADL) measured?

    Find out how to apply sensitivity analysis to your investment decisions, why sensitivity analysis might be useful and what ... Read Answer >>
  5. What is the difference between systemic risk and systematic risk?

    Systemic risk is generally used in reference to an event that can trigger a collapse in a certain industry or economy, whereas ... Read Answer >>
  6. What are some examples of ways that sensitivity analysis can be used?

    Understand the concept of sensitivity analysis and learn about the wide variety of disciplines to which it can be applied. Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center