This is because the bank lending rate is also a function of financial regulations (placed on banks to enhance financial stability and consumer protection), as these tend to increase banks’ costs which, to a certain extent, are passed on to customers in the form of an increased interest rate margin. This concept can be illustrated in the stylised equation for the lending rate by adding a variable ( ) which designates regulations affecting the interest rate margin:  This equation is, of course, a simplification, but it is useful for illustrative purposes. It shows how some static macroprudential instruments, such as increased capital or reserve requirements, will affect the interest rate margin in a “one-off shift” when they are introduced, which will affect the transmission mechanism during the period of adjustment. However, there are also likely to be dynamic macroprudential instruments, such as time-varying countercyclical capital buffers, aimed at ensuring that macroprudential policy can influence the availability and pricing of credit throughout the cycle. These time-varying instruments will affect the transmission mechanism on an ongoing basis as they change over time. 8  BIS central bankers’ speeches  But the instruments are not perfect substitutes While the effects of monetary and macroprudential instruments may overlap, they are not perfect substitutes. 9 As stated earlier, the macroprudential policy toolkit is likely to include a diverse range of instruments that operate in different ways on different elements of the financial system. And the effect of these instruments on policy objectives other than macroprudential policy will also vary.

The macroprudential mandate is likely to be broad in scope, as system-wide risks can arise in a wide range of ways and from a wide range of sources. Consequently, the range of macroprudential instruments must be equally broad in scope. Discussions of macroprudential instruments usually emphasise the need for instruments that operate in two dimensions: the time or cyclical dimension, in which instruments are designed to counteract financial multipliers/ accelerators that amplify cycles; and the cross-sectional dimension, in which instruments are required to isolate or dampen the transmission of problems across the financial system. While it is important that the macroprudential agency has control over instruments to prevent and mitigate system-wide risks, it is not essential for the agency to implement these instruments itself. The macroprudential toolkit is likely to include instruments used for other policy objectives and not implemented by the macroprudential agency (for example, capital requirements and insurance premiums). Overlap between policy areas The overlap between different policy areas is one of the major challenges to the design of effective governance arrangements. Responsibility for using instruments that can be used for multiple policy objectives is more complicated and policy-setting is more difficult as policymakers must consider the unintended impact of their instruments on other policy objectives and the unintended impact of other policy-makers’ instruments on their own policy objective. The use of an instrument for one objective may conflict with or amplify the effect of instruments used to achieve a different policy objective.