Under this rule, capital adequacy for the four main banks in Sweden is a function of the banks’ long-run capital adequacy ratio, the credit gap and the output gap. Figure 5: Countercyclical capital buffer using capital adequacy rule  Source: Riksbank  Again, this exercise is purely illustrative, but the results are encouraging, as the rule would have raised the banks’ capital in the run-up to the recent crisis and lowered it after the crisis hit. And the results broadly match those from a similar exercise conducted by Claudio Borio, in which a measure of the credit-to-GDP was used to guide the size of countercyclical capital buffers in Sweden since 1980 (Figure 6). 13  13  Claudio Borio, “Credit in monetary and (macro-)prudential policy”, Sveriges Riksbank workshop on housing markets, monetary policy and financial stability, November 2010. BIS central bankers’ speeches  11  Figure 6: Countercyclical buffers in Sweden using credit-to-GDP gap-rule  Vertical shaded areas indicate the starting years of system-wide banking crises. The countercyclical buffer is 0 when the value of the credit/GDP gap is below 2, and 2.5 when it is above 10%; for gaps between 2 and 10% the buffer is calculated as 2.5/8 times the value of the credit/GDP gap exceeding 2%. Source: BIS calculations. However, much more work is required, for example to allow the approach to include other regulations, to determine how best to calculate the sustainable level of credit in the long-run, and to overcome the econometric problems when estimating the rule.

Memorandums of Understandings or information-sharing protocols would then be used to ensure the free sharing of information between agencies. The analytical skills and tools required for macroprudential policy are likely to draw on those used for macroeconomic analysis and, to a lesser degree, microprudential analysis. But the  7  This argument is developed by Martin Cihák in a speech “Price stability, financial stability and central bank independence”, 38th Economics Conference of the Oesterreichische Nationalbank, 2010. A number of case studies illustrating how inadequate independence arrangements for financial sector regulators and supervisors have contributed to the emergence and scale of financial crises are presented by Marc Quinton and Michael W. Taylor in “Regulatory and supervisory independence and financial stability” IMF Working Paper, WP/0246, 2002. 6  BIS central bankers’ speeches  macroprudential agency will need to build new analytical techniques. Before the crisis, many central banks had already begun to develop the type of system analysis that will be required for macroprudential supervision (for example, in the assessment of interdependencies and systemic risks included in financial stability reports) – but the analytical techniques remain in their infancy. Control over a sufficient set of tools As well as the information and knowledge necessary for effective analysis, the macroprudential agency must have access to suitable instruments in order to achieve its mandate. Otherwise there will be unreasonable expectations of what the macroprudential agency can achieve, as it may be unable to address the system-wide risks that it identifies.