Macroprudential Ideas and Auxiliary Change in Financial Governance Paradigm

Abstract

Since the global financial crisis of 2008, some have referred to the macroprudential turn in global financial governance as a paradigm shift. However, this article argues that macroprudential ideas cannot be seen as a paradigm shift since macroprudential regulation supplements, rather than replaces, existing microprudential regulation. In this respect, it is more precise to conceptualize the macroprudential turn as “auxiliary change,” which means an incremental change brought about by adding auxiliary hypotheses while maintaining the hard-core assumptions of the existing policy paradigm. The hardcore assumptions of the financial governance paradigm are its ontology and epistemology, which stipulate what entities constitute financial markets and how actors understand the financial world surrounding them. Macroprudential ideas have not changed the core ontological and epistemological assumptions of microprudential ideas, that is, individualistic ontology and rationalistic epistemology. Rather, they have introduced auxiliary hypotheses, such as a fallacy of composition and bounded rationality, into the financial governance paradigm to explain a newly identified anomaly, namely, systemic risk. Diametrically opposed to the orthodox paradigm in terms of ontology and epistemology is what can be called “social constructivist ideas,” which are founded on sociological ontology and epistemology.