Indeed, we currently lack a precise but comprehensive definition of financial stability. In addition to giving the macroprudential agency a clear mandate, there should be a transparent decision-making process that avoids political and interest group pressure. This is necessary to ensure that the macroprudential agency is free to make interventions that impose short-term costs on financial institutions or the public in order to achieve long-term benefits through financial stability. 7 While the macroprudential agency must be independent, it must also be accountable for its actions (or lack of action). A clear mandate will help achieve accountability and make assessment of the macroprudential agency against its objectives easier. Information and analytical capability Effective governance arrangements must also ensure that the macroprudential agency has access to the information and analytical capability needed to quickly identify system-wide risks and to determine when and how instruments should be used in response to these risks. Information on exposures between institutions and on exposures commonly held by institutions is likely to be crucial for macroprudential supervision. Much of this information will need to be obtained from individual institutions and may overlap with the type of information collected for microprudential purposes. The collection and sharing of this information may be easier if the microprudential and macroprudential agencies are located together. An alternative approach would be to give a separate microprudential agency responsibility for collecting the information necessary for the conduct of microprudential and macroprudential policy.

The choice between prohibition and taxation is not new to public choice economics. And vulnerabilities are building up internationally The build-up of problems is even more apparent when looking internationally; in particular at the recent difficulty eurozone countries with weak public finances have had in issuing government bonds. 6 Investors are increasingly making similar assessments with regard to  5  The current maximum loan-to-value ratio constrains the amount a household can borrow in a mortgage contract but places no limit on other forms of lending to that household. A binding maximum loan-to-value ratio on household borrowing could place a firmer limit on households’ total borrowing. 6  One of the reasons that the Swedish economy is currently experiencing relatively strong economic growth is that Sweden’s public finances were comparatively strong going into the crisis. Therefore, Sweden has  4  BIS central bankers’ speeches  sovereign risk as the Riksbank is making for Swedish household debt. For example, debt-toGDP ratios give a similar picture for countries’ ability to repay debt as the debt-to-income ratio shows for households. There are fairly well developed and commonly used techniques to estimate probabilities of default (PD) and loss given default (LGD) on banks’ loan portfolios, which are useful for the conduct of microprudential policy. These techniques are also useful for macroprudential policy, and should be used more extensively, as they can be used to estimate PDs and LGDs at an aggregated level for entire sectors (eg banks, households, corporates).