Systematic Risk and Prudential Supervision

This paper develops a new viewpoint about how to supervise the systematic risk in financial institution. The author suggests that different prudential supervision mode should be applied for different objects. For a single bank, the department should strengthen the micro-prudential supervision, using rigid constraint provision to monitor the balance sheets. For the correlation between financial institutions and products, the regulators should stress the macro-prudential supervision on the whole system, using free judgment provision to regulate the risk.