For instance, consider a bout of “irrational exuberance” on the part of households, businesses and investors. The increased optimism is associated with an increase in the demand for goods and services from households and businesses, together with increased demand for credit and a reduction in the credit spread. So both PS and FS shift out to the right, as in Chart 12. As drawn, both instruments are therefore tightened. In other cases, it will be appropriate for the instruments to move in opposite directions. For instance a beneficial supply shock will usually generate disinflationary pressure requiring lower interest rates, other things equal. So the price stability schedule shifts in. But it may well also encourage increased borrowing and a compression in spreads, leading the financial  BIS central bankers’ speeches  7  stability frontier to shift out. In this example, monetary policy is loosened at the same time as macroprudential policy is tightened (Chart 13). Superficially this could look as if the monetary and macroprudential policymakers are at odds with each other, though such a rebalancing of the mix of policies is in fact entirely appropriate. There are, however, important qualifications to this somewhat Panglossian view of the ability to maintain both price stability and financial stability by assigning monetary policy to the former and macroprudential policy to the latter. Compared to the impact of changes in interest rates, we have relatively little experience of deploying macroprudential instruments.

12 Member States have decided to impose a positive rate on the countercyclical buffer.7 The ESRB has likewise taken action. In 2016, it issued warnings to eight countries, drawing attention to medium-term vulnerabilities in the residential real estate sectors. In six of these countries, the ESRB judges that the vulnerabilities have not been sufficiently addressed and on Monday published recommendations setting out remedial action to be taken.8 Five further countries were issued with warnings.9  Areas for further progress in macroprudential policy Yet the overall framework for macroprudential policy in Europe remains incomplete. We need progress in three key areas to counter systemic risk more effectively: better analytical tools, new instruments that counter the development of risk outside the banking sector and a clearer framework to govern policy actions. The past decade has seen a sustained improvement in the tools available to assess risks to financial stability. Better data and better modelling techniques have revealed important insights. Developing the analytical toolkit to adequately monitor interconnectedness and contagion requires granular datasets, and the ability to map and link data across entities and markets. The sub-prime crisis in the US banking sector spread to European banks through their direct exposures, but it also spread to insurers through the use of credit default swaps.10 Only a holistic view of the system will allow potential contagion channels to be identified and modelled. And that requires investing in new technologies for data analytics and enhancing the capacity for authorities to link and share data and technical knowledge.