The operators of these systems are supervised as banks by the Swiss Federal Banking Commission (SFBC). Cooperation between the SFBC and the SNB is facilitated as the provisions in the Banking Act and the requirements stipulated by the National Bank Ordinance are partly similar, and both authorities wish to minimise the regulatory burden. This is also in the interest of the systems that are subject to oversight. I should add that not only the SFBC, but all of the evaluated systems have the opportunity to comment on our classification. The classification will be finalised at the beginning of next year. Basel II: a never-ending story? The National Bank is involved in the implementation of the recommendations on the international convergence of capital measurement and capital standards, known as Basel II. The National Bank does not only provide a member to serve on the Basel Committee on Banking Supervision. As an authority committed to system stability, it also shares the responsibility of adequately implementing the Committee’s recommendations. The SFBC’s fundamental hypotheses are undisputed, namely that the current provisions are in need of reform and that the recommendations of the Basel Committee are to be implemented with  1/2  moderation, while at the same time any dilution of the capital adequacy requirements aimed at reducing the insolvency risks has to be avoided. We are confident that the parties directly involved, ie the SFBC and the banks, will again succeed in agreeing, within the given time frame, on pragmatic and acceptable solutions.

Moreover, debt pays the same return in all states of the world except when default takes place, while the return on equity will vary; that makes debt more attractive for some investors, especially during financial booms when the probability of default appears low. Raising the capital requirements on particular components of banks’ balance sheets by varying sectoral risk weights is different in that it alters the relative attractiveness of different sorts of lending. Assuming that the increase in capital requirements is targeted at those sectors where the risks are most material, then not only is resilience increased but it also encourages substitution towards safer forms of lending and thus has a pre-emptive character. Finally, there are tools that directly target borrowing, such as loan-to-income or loan-to-value caps, and restrictions on the share of banks’ portfolios that can be allocated to high loan-toincome or loan-to-value lending, as recently introduced by the Reserve Bank of New Zealand. By acting directly on the riskiest segments of lending, such tools are more obviously pre-emptive in nature. Importantly, while monetary policy is well-suited to dealing with the problems that arise from sluggish wage and price adjustment, a good macroprudential tool will be one that is well targeted at dealing with a particular financial market failure, such as the underestimation of risk. To see, in a highly stylised way, how monetary and macroprudential tools can be combined, as well as the appropriate instrument assignment, consider first Chart 8. The left-hand panel is relatively conventional and portrays the market for goods and services.