VoxEU Column Macroeconomic policy

Everybody right, everybody wrong: Plural rationalities in macroprudential regulation

Macroprudential policy has become increasingly popular in the aftermath of the Global Crisis, but it remains controversial. This column argues that vigorous disagreement is both inevitable and healthy, reflecting differing fundamental views of how the financial system really works. By embracing the divergence of views instead of seeing it as problematic, macroprudential policymaking will be made easier and more effective.  

What is the point of macroprudential regulation, or ‘macropru’? If we were to ask ten people that question, we might receive ten very different answers. Are we, as suggested by Claudio Borio in 2009, “all macroprudentialists now”?

Surprise? Not really – when the various stakeholders come to the question from any number of differing directions, they cannot possibly converge to a single answer.  Even more so when their views are not only incompatible but reflect deeper disagreements about economic ideals, rationality, and even morality.

For the policy authorities this is problematic. How can one design effective policy when there is no consensus, even in principle, about what the authorities should be doing?

Framing the debate

The heterogeneity of views on macropru arises from conflicting accounts of the nature of the financial system itself. As a consequence, if one wants to understand the challenges facing macroprudential policymaking, it is necessary to examine more closely the stories that people tell about the financial system.

In this, we borrow a framework originally developed in anthropology by Thompson et al. (1990) and since then widely applied to complex decision-making problems, from environmental problems and political science (Verweij and Thompson 2006) to insurance risk management (Ingram et al. 2014, Working Party 2015).  

This framework identifies four different fundamental views about the world, labelled 'rationalities'. Each rationality captures how one’s perception of a system’s properties reflects moral, political, and economic ideals and beliefs. They are called individualism, hierarchy, egalitarianism, and fatalism.  

Adapting this framework to portray how different actors see the financial system and the role of macro-prudential policy, we get the following four accounts, presented here as caricatured views.

  • Hierarchy: The financial system can and must be understood and controlled

This is the world of the global regulatory bureaucrat who wants to dutifully control, steer, and protect. She argues that the financial system is both a force for good and a source of abuse and crisis. By applying sufficient effort and deliberation one can understand the financial system well enough to make it work better, thereby avoiding crises and abuse, while keeping the system both profitable and robust enough to drive economic growth. A key concern is keeping the cognitively flawed and oh-so-easily-corrupted market participants on the straight and narrow.

  • Individualism: Markets are benevolent and stable

This is the world of the free market faithful, who above all crave the liberty to transact in an unfettered market. In their view, by attempting to control the financial system one destroys wealth and individual accountability. It is impossible to effectively regulate the financial system because it is so complex that one cannot possibly control everything that happens within it. Macropru is just like the scientific socialism of years past – and see how that worked out. Markets should be left to do what they do best, i.e. create wealth. Adam Smith nailed it in 1776: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

  • Egalitarianism: The financial system does not create wealth – it destroys it

This is the world as seen by activists and establishment critics who feel they represent ‘the 99%’ and argue that deregulation and the financialisation of the economy increase inequality and shatter social cohesion. Free markets don’t optimally allocate resources, but shift them to the undeserving rich – with the collusion of predatory bureaucracies and governments. After all, as noted by David Graeber (2016), doesn’t Wall Street extract up to 40% of common peoples’ household revenue? Aren’t bankers still getting substantial bonuses in spite of running their institutions into the ground and receiving taxpayer bailouts? The poor subsidise the rich. The system is no longer sustainable and is about to implode. Forget regulation; radical change to the system itself is needed NOW.

  • Fatalism: The financial system is unpredictable and uncontrollable, driven by power and by luck

The world of the sceptical pragmatist and the amoral manipulator who sees a dog-eat-dog world. People are unreliable and unpredictable. The system is fragile and abusive because it was made so by the unholy alliances between political leaderships, banks, and lobbyists. That enabled the excessive risk-taking that played such an important role in the crisis from 2007, as argued by Calomiris and Haber in 2014. Not much you can do really – regulation is pointless anyway. If you must, comply, but in the meantime seek to go around it. Or if you can, cut a deal with the regulators – they are also not impervious to the dark arts, are they? Moral outrage is pointless – just try to survive and make some money along the way.

Starting from each of those four perceptions, we get to four different conclusions on macro-prudential regulation, in what we call the macropru matrix. 

Table 1. The macropru matrix 

Everybody right, everybody wrong

Of course, we do not often see these four types of arguments in such pure form. The same person may appeal to different views at different times, or mix them up in a complex and even contradictory argument:

  • Those arguing against regulations from a libertarian perspective often conflate the individualist argument for self-regulation, which assumes that markets, if left undisturbed, are essentially benign, with the fatalistic view of individuals as amoral manipulators, who will find their way around any rule.
  • Similarly, the political case for macropru while coming from a hierarchical direction is made stronger through an uneasy alliance with the moral outrage of the 99%.
  • Those who complain about the wildness of markets and the fragility of the system, often combine high-minded egalitarian ideas of fairness with the fatalists’ unbounded cynicism.

That people pick and mix views like that is not a sign of confusion. Each of the four rationalities captures some hard-won wisdom about the financial system – but each provides a description that remains incomplete.

In fact, excessive purity of view in a world so full of contradictions can be detrimental, leading to less understanding and worse decisions.

Seeing the world as it is turns it into what it is not

The systemic nature of financial risk is one reason that regulatory policy cannot be successfully framed in the terms of just one rationality. If the financial system were clearly described by one of the four views we explored above, the rational and coordinated responses of economic agents would alter the system’s properties and therefore invalidate the basis for the decisions taken.

Seeing the world as it is turns it into what it is not. As Hyman Minsky noted, stability is destabilising.

Suppose that the financial system, as envisaged by Hierarchy, needs control, effectively delivered by macropru. That endogenously undermines the regulations, in a way discussed by Danielsson et al. (2009) for at least two reasons.

  • This ignores the survivalist responses of intelligent market participants who may be incentivised to load up on risk out of sight;
  • Successful macropru depends on the authorities’ detailed understanding of the system. But, as we have argued here on Vox before (Danielsson 2013), such regulations breed homogeneity and increasing complexity in financial markets, leading to a more fragile system, closer to (rather than further from) collapse.

Control comes at the expense of procyclicality and systemic risk. What remains may only be the illusion of control.


Following the Global Crisis, macropru has emerged as the third pillar of financial policy, along with microprudential regulation and monetary policy. But unlike those two, macropru is highly controversial, not only in how the policy should be implemented but, more importantly, in whether it is needed at all.

This has bedevilled the work of policymakers. The deep disagreements around macropru arise from the complexity of the problem of regulating a financial system. And it is that very complexity which makes it necessary to consider all four rationalities, each of which gives a legitimate but incomplete portrayal of the system. 

In our view, macroprudential policymakers have been content to stay within an agenda prescribed by hierarchy and have tended to neglect the insights and challenges from coming from other rationalities. Therefore, macropru has not received the same level of broad support as the other two pillars of financial policy.

While embracing all competing rationalities will not make policymakers infallible, it will enable them to steer the policymaking process in a way that increases the likelihood of success, not least by securing stronger support by various interest groups, characterised by different rationalities.

By accepting that heterogeneity of views is a part of the solution, policymakers are well placed to incorporate important but different perspectives into policy design. That will enable them to adapt to and shape the world they are faced with, not the world they would like to exist. Discussing how this works in practice is the subject of our next column.


Borio, C (2009), “The macroprudential approach to regulation and supervision”, VoxEU.org, 14 April.   

Ingram, D, M Thompson, A Underwood, and E Varnell (2014), “Exploring the regulator's approach to risk culture”, InsuranceERM.    

Calomiris, C W and S H Haber (2014), Fragile by Design: The Political Origins of Banking Crises and Scarce Credit. Princeton University Press.

Danielsson, J, H S Shin, and J- P Zigrand (2009), “Modelling financial turmoil through endogenous risk”, VoxEU.org, 11 March.      

Danielsson, J (2013), “Towards a more procyclical financial system”, VoxEU.org, 6 March

Graeber, D (2016), “The era of predatory bureaucratization – An interview with David Graeber”, Interview with A. De Grave in OuiShare, 21 January 2016  

Smith, A (1776). An Inquiry into the Nature and Causes of the Wealth of Nations.

Thompson, M, R Ellis, and A Wildavsky (1990), Cultural theory, Westview Press.

Verweij, M and M Thompson, eds (2006), Clumsy Solutions for a Complex World: Governance, Politics and Plural Perceptions, Palgrave Macmillan.

Working Party on Model Risk (2015), “Model Risk: Daring to Open the Black Box”, British Actuarial Journal.

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