In the GFC’s aftermath, as the costs of ignoring the build-up of systemic risks became painfully clear, national regulators and international institutions joined forces to build the foundations of our current macroprudential frameworks. These comprise two types of policy. First, policies that aim to contain the build-up of vulnerabilities, for instance by reducing 1  Cf. Jordà, O., M. Schularick, and A. M. Taylor (2015), Leveraged bubbles, Journal of Monetary Economics, vol. 76(S): 1-20, and Jordà, O., M. Schularick, and A. M. Taylor (2015), When Credit Bites Back, Journal of Money, Credit and Banking, 45: 3-28.  excessive credit growth and bank leverage, or by improving the average quality of bank assets. Second, and absolutely essential in my view, policies designed to strengthen banking sector resilience. By this, I mean ensuring that the banking sector has enough capital to absorb losses that could materialise in a crisis, and is able to continue to provide financial services to the real economy without the need for government intervention. It is important to remember that macroprudential policy cannot always prevent financial crises. Rather, by pursuing its objectives and in particular by ensuring banking sector resilience, macroprudential policy should reduce the likelihood of financial crises occurring, and limit the extent and duration of recessions if a crisis occurs. Ensuring resilience is particularly important in Switzerland, given the large size of the Swiss banking sector relative to the size of the economy – also by international standards – and the dominant role played by a small number of banks.

2 Instruments  Macroprudential authorities have a wide range of instruments at their disposal to achieve these objectives. In order to contain the build-up of vulnerabilities, authorities can rely on instruments that aim to keep borrowing at sustainable levels. Examples of these so-called borrower-based instruments are restrictions on the loan-to-value (LTV) or loan-to-income (LTI) ratios, as well as specific requirements on loan maturity and amortisation. Specifically, these instruments limit borrowing from households who have insufficient personal equity, or whose income would not be able to cover debt payments if interest rates were to rise beyond a certain level. As a result, these instruments should reduce overall credit growth and, indirectly, house price growth, thereby containing the build-up of vulnerabilities. In order to strengthen banking sector resilience, macroprudential authorities can rely on instruments that directly target bank capital, the so-called capital-based instruments. These instruments increase bank capital above minimum capital requirements. In other words, they create a safety buffer that serves as a shock absorber in times of stress. Important instruments in this category are capital buffers that depend on a bank’s size (e.g. buffers for global systemically important banks). In addition to these structural instruments, authorities can rely on an instrument that depends directly on the level of cyclical risks in credit markets, namely the countercyclical capital buffer (CCyB). The idea behind the CCyB is that banks should build up capital gradually as cyclical risks in credit markets increase, thereby strengthening their resilience.