This is typically carried out through countercyclical instruments, such as capital buffers, which should be accumulated over expansionary periods and, eventually, be released in downward phases in order to smooth total credit over the cycle. Second, macroprudential policy is concerned with the structural features of the financial system. This is a notion that has to do with the impact on systemic risk arising from the size, 3/5  complexity and interconnections of certain financial institutions. It is essential that financial institutions duly internalise the impact of their decisions on the whole system, which is generally greater for larger, more complex, more interconnected and less substitutable financial institutions. Capital buffers specifically tailored to the most systemic banks have been introduced in recent years in many countries, within the framework of the G20, the Financial Stability Board and the Basel Committee on Banking Supervision initiatives, precisely to address this issue. Another interesting tool for financial stability, of potential macroprudential use, are the stress test exercises. Notwithstanding their current limitations, stress tests represent a major effort by supervisory authorities to assess the impact of different adverse scenarios on the financial system, to convey its state of resilience to the public and to inform the necessary follow-up actions. Summing up, the macroprudential policy toolkit has significantly expanded in recent years. This is a change in the right direction because, beyond conferring new powers to central banks and supervisory authorities, it requires the adoption of a system-wide perspective in policy-making.

Needless to say, macroprudential policy cannot be fully understood without assessing how monetary, microprudential and even fiscal policies may affect financial stability. 4/5  Experience at the Banco de España with dynamic provisions Let me finish by briefly referring to our own experience in dealing with financial stability. Spain was among the European countries building up very pronounced imbalances over the opening years of this century and, then, going through a very severe crisis. The Banco de España was, I believe I may venture to say, a pioneer in developing macroprudential tools, by introducing countercyclical provisions as early as the year 2000, a short time after the launching of the European Monetary Union. Research carried out at the Banco de España shows that these provisions, although not able to counter the strong credit growth in the boom years, proved effective in smoothing the credit contraction during the early years of the recession. In addition, “dynamic” or “statistical” provisions –the names more frequently used in Banco de España papers when those provisions were first implemented– were, I think, a kind of inspiration for the countercyclical capital buffer, an instrument developed and agreed by the Basel Committee in 2010, and now widely implemented around the world. Dynamic provisions can also be considered, with some nuances along the way, the precursor of expected-loss provisions. The recent introduction of expected-loss provisions has entailed a change of the accounting paradigm, which, so we think at the Banco de España, was long overdue from a banking supervisory perspective.