the scope and impact are much larger. let me give an example. • a loan - to - value ratio of 80 % for property loans, applied through the cycles, as we have had in singapore for many years, is a microprudential tool. • but when we limit the loan - to - value ratio to 20 % for a third property loan, as we have done in singapore recently, it becomes a macroprudential measure. macroprudential policy may well be old wine, but it is in much bigger bottles! 34 second, unlike monetary policy which has a single instrument, macroprudential policy requires a multi - dimensional approach. there is no single instrument that has a stable and reliable relationship with financial stability or asset price stability. 35 macroprudential policies encompass more than just counter - cyclical capital buffers. adjusting capital requirements in a counter - cyclical fashion or increasing the risk weights for loans to vulnerable sectors cannot fill the cracks completely. in a boom market characterised by keen competition among banks, higher capital charges do not translate into sufficiently higher lending rates that can restrain demand. • a cross - country study by the basel committee on banking supervision shows that a 1 percentage point increase in capital ratios results in a median rise in lending spreads of only 13 basis points. 36 dealing with the magnitude of financial cycles or bubble dynamics that economies typically face from time to time requires some absolute prudential limits. in singapore, we have employed the following limits on property loans : • loan tenure cap of 35 years. bis central bankers ’ speeches • loan - to - value ratios of 80 %, 50 %, and 40 % for the first, second, and third property loans respectively, for tenures less than 30 years ; for loan tenures more than 30 years, the loan - to - value ratios are 60 %, 30 %, and 20 %. • total debt - service ratio of 60 %, taking into account all debt obligations and using a medium - term interest rate of 3. 5 % for residential properties. ( current mortgage rates are generally below 2 %. ) • cap on banks ’ property - related exposures at 35 % of their total exposures. 37 in fact, macroprudential policies need not even be limited to prudential tools at the disposal of central banks or financial regulators. in the face of abundant global liquidity, credit - based prudential measures may not constrain loan growth or asset price increases sufficiently. singapore

use of capital buffers to pre - empt insolvencies. • in the second approach, monetary policy explicitly takes account of financial stability in addition to price stability. • under the third approach, monetary policy remains focused on price stability, while financial stability is secured with the help of macroprudential policy. 13 i will keep my remarks on the first approach brief as it is well - known and is still the dominant practice in most central banks today, especially in the advanced economies. under this inflation targeting approach, monetary policy will not try to respond to credit cycles or asset bubbles unless they have a demonstrable impact on inflation outcomes. • as lars svensson puts it, flexible inflation targeting “ remains the best - practice monetary policy before, during, and after the financial crisis ”. • john taylor, who will address us this evening, provides a more rule - based characterisation of this approach through the taylor rule. • he finds that if monetary policy in the us had been appropriately configured to macroeconomic outcomes in the 2000s, the housing boom would have ended in 2003 instead of 2006 and that mortgage debt levels would not have risen so high. let me now take up the second and third approaches in more detail. the phrase is taken from eichengreen and mitchener ’ s 2003 bis working paper on “ the great depression as a credit boom gone wrong ”. bis central bankers ’ speeches monetary policy : getting in all the cracks 15 the intellectual underpinning for the second approach is based on the insight that monetary policy has the potential to affect financial stability through the “ risk - taking channel ”. 2 • jeremy stein puts it succinctly – “ monetary policy is fundamentally in the business of altering risk premiums ”. 16 loose monetary policy can heighten vulnerabilities in the financial system by altering both the perception of risk and the tolerance for risk. • in conventional monetary policy, lower policy rates boost incomes and profits, and enhance asset and collateral values. this reduces banks ’ estimated probability of defaults and losses, leading to greater leverage and risk - taking. • in unconventional monetary policy, large scale asset purchases by central banks depress returns along the entire yield curve. this provides asset managers the incentive to take on more risk, often in a herd - like fashion. 17 when interest rates are below the natural rate at which desired investment and savings equilibrate, banks will continue to expand credit. when economic agents are determined to take risks, they will