Marja Nykänen: Black swans and grey rhinos - lessons of crises on
macroprudential policy
Opening remarks by Ms Marja Nykänen, Deputy Governor of the Bank of Finland, at the
Conference on Systemic Risk Analytics, Helsinki, 5 May 2022.
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Good morning, ladies and gentlemen. I am happy to see so many of you here in Helsinki. I also
warmly welcome all of you participating online.
Dear audience, in late January I gave a speech in a seminar, whose topic was black swans in
financial markets. As you well know, black swans are unforeseen events with extreme
consequences. At the time of the seminar in January, the black swan everyone had in mind was
of course the Covid-19 pandemic.
In my speech back then, I discussed how the Covid-19 and another black swan - the Global
Financial Crisis that started less than 15 years ago - have shaped our thinking of financial
regulation, crisis response and macroprudential policies. I also talked about another concept
from the natural world, the grey rhinos. A grey rhino can be defined as a well-known and
slowmoving risk that can cause or amplify financial or other crises, if it ́s ignored long enough. For
example, high household indebtedness and climate change can become grey rhinos if we don ́t
act decisively to slow them.
Since black swans are, by definition, unforeseeable, neither I nor other participants of the
seminar could foresee that the next black swan was about to emerge only one month later.
Russia ́s brutal assault on Ukraine has shocked the world, caused immeasurable human
suffering, and is changing the way we see geopolitical risks, cyber security, national security and
transition to green energy, among other things.
In these opening remarks, I will return to the topic of my speech three months ago: What are the
lessons of financial crises on economic policies, especially on macroprudential policy? I will also
provide my first thoughts on the potential impacts of the war in Ukraine on financial stability.
Crisis will happen, but we can prepare for them
The global financial crises reminded us that the financial system can create systemic risks that
can lead to systemic financial crisis. Policymakers also recognized that monetary policy and
financial supervision and regulation are not always sufficient to prevent and manage financial
crises. New analytical tools were needed to identify the emerging systemic risks as early as
possible. And new policy tools were needed to reduce those risks. A new policy field - the
macroprudential policy - was created.
It is impossible to know in advance the exact timing of the onset of a financial crisis. However,
crises can and should be analysed and understood ex post. Post mortem analyses of financial
crises have shown that many crises have been preceded by the same factors, such as large
imbalances in housing markets or excessive risk taking and short-term funding by financial
institutions.
I strongly believe that the macroprudential authorities have become much better in identifying the
warning signs of financial crises - which are often grey rhinos - and in using their
macroprudential tools, like banks ́ countercyclical capital requirements and loan-to-value (LTV)
caps for housing loans, to reduce those risks. Strongly accommodative monetary and fiscal
policies have been equally important in cushioning the impacts of the shocks that we have
recently experienced.
The implicit objective of the global and national regulatory and institutional reforms that have been
made in the last ten years or so has been to reduce the risk of financial crisis building
up inside the financial system. However, the last two major global economic shocks - the
Covid19 and Russia ́s assault in Ukraine - have been black swans that have originated outside of the
financial system.
For me, the key lesson of the last 15 years is that, despite the major improvements in financial
regulation, supervision and economic policies, there will be large-scale economic or financial
crises also in the future. Unexpected exogenous shocks can never be fully prevented. And it
would be premature to rule out the traditional financial crises.
But economies and financial systems can be made more resilient to withstand any future shocks
and crises. In public finances, that means sustainable debt levels over the longer-term. For
banks and other key financial institutions, it means strong capital and liquidity positions and
welldiversified long-term funding structures. For households and corporates, it means avoiding
excessive borrowing and indebtedness. In addition, active macroprudential policies are needed to
smoothen financial cycles and to prevent to build-up of imbalances in asset markets.
Of course, resiliency should not be pursued at all costs. There would be few accidents in the
highway, if the speed limit was set at 30 kilometers per hour. But, as a result, there would be
much less traffic as well. As always in financial policy, we should try to strike the right balance
between stability and growth.
The impact of the war in Ukraine on systemic risks
It is way too early to assess even the short-term effects of the war in Ukraine on financial
stability, let alone longer ones. However, I try to provide some very first thoughts.
First, let me start from a positive note. The outbreak of the war has not really threatened the
functioning of global or European financial markets or financial institutions. Neither has the
Covid19. Clearly, the regulatory and institutional reforms undertaken after the Global Financial Crisis
have made the global financial system safer and more resilient.
Second, many European countries had become much too dependent on the fossil fuels imported
from Russia. Using the vocabulary of swans and rhinos, the Russian energy imports were a grey
rhino in the room: an obvious risk that many countries, politicians and firms found convenient to
downplay in good times. But now, the rushed transition to other energy producers and sources is
speedening inflation, reducing growth and increasing risks to financial stability.
Third, the geopolitical tensions have brought new financial stability risks at a forefront. Therefore,
we must pay increasing attention in our financial stability analysis for example to financial
institutions ́ resilience against cyber risks in an interconnected world and on the operational
capacity of payment systems under stressed conditions.
More generally, the experiences of the last few years suggest that we should proactively develop
societies that are resilient to adverse shocks. In his recent book, The Resilient Society, professor
Markus Brunnermeier outlines what that requires. In his broad interpretation of resiliency, resilient
societies not only pursue macroeconomic and macroprudential resiliency, but also foster sense
of community, reduce inequality to make the social contract more acceptable and innovate to
tackle the climate change.
Key topics of the conference
To finish, I want to congratulate the organisers for compiling such a topical and wide-ranging
programme for this conference. It is my great pleasure to welcome the accomplished keynote
speakers, the Nobel laureate Bengt Holmström, Pekka Ala-Pietilä, the Chairman of the EU ́s
High-Level Expert Group on Artificial Intelligence and the Former President of the Nokia
Corporation as well as Doyne Farmer, one of the key thinkers in a number of fields ranging from
chaos theory, complex systems, ecology and economics, to mention just a few.
Let me highlight some other topics and presentations of this conference which are of great
interest for me as a policy maker and practitioner.
We have presentations on the application of text analysis to better understand historic financial
crises and to assess bank networks during the Covid crisis. The development of new tools is
what drives science forward.
We have presentations related to cyber risks, climate change and the financing of green
transition. I don ́t need to emphasize the importance of these topics. And we have presentations
related to macroprudential policy and its design. For macroprudential policy makers like myself,
the insights of such a research are invaluable.
And we have much more. I wish all of you a very fruitful and productive conference.