efforts are under way in various international forums. bis central bankers ’ speeches stability. to highlight this in more detail, i will provide a general picture of how i view macroprudential policy. as a starting point, i will take the interest rate which households and companies pay for loans ( itlending ). put rather simply, this can be defined as the central bank ’ s policy rate [UNK] [UNK] plus an interest rate margin ( t ) : itlending it t. the interest rate margin depends on the banks ’ compensation for administrative expenses and capital and funding costs, risk premiums and the banks ’ profit margin. credit terms such as the loan - to - value ratio and amortisation requirements are not directly visible in the interest rate encountered by borrowers, but in order to illustrate their effect at an aggregate level, they can be restated into interest rate terms. in order to obtain a simple formula, i therefore include the credit terms in the “ interest rate margin ”. interest rate margins and credit terms tend to vary over time with the financial cycle. when the future outlook is bright and financial agents, households and companies alike are optimistic, risk premiums are usually low, which leads to lower lending rates and generous credit terms. this contributes to a rise in credit growth and asset prices. when outlook deteriorates, banks ’ lending becomes riskier, or is at least perceived as such, which can be noticed in higher risk premiums and tougher credit terms. the banks, quite simply, become more restrictive in their lending in bad times and we will have a downturn in the financial cycle. so, why should central banks take account of fluctuations in interest rate margins and credit terms? well, because there is a series of so - called external effects associated with financial activity which lead to the banks ( and other financial agents ) intensifying these fluctuations. the majority of the external effects are due to the fact that the social costs of financial instability are greater than the costs borne by the banks. put simply, financial stability can be equated to stable interest rate margins and credit terms over time. 4 in other words, interest rate margins which are not too low in good times or too high in bad times, and credit terms which are not too generous in good times or too restrictive in bad times. lending and the building up buffers among both lenders and borrowers then stabilises over time. i would like to emphasise that this is a highly simplified description

##ntial policy and a need to coordinate macroprudential and microprudential supervision – the need to lean against the wind is also affected by other policy areas. fiscal policy has a significant influence on borrowing and lending incentives. however, other policy areas can also come into play, such as housing policy when it comes to household indebtedness. there is thus a limit to what can be achieved by macroprudential policy, or monetary policy for that matter, which depends on other policy areas. the opportunities and limitations of macroprudential policy – the example of the swedish household sector i will now be much more specific about the opportunities and limitations of macroprudential policy by focusing on a concrete example. by now, it is well known that, for a number of years, the riksbank has seen substantial risks associated with household indebtedness. also, a number of external experts have indicated the housing market and private indebtedness as a risk factor. 5 in other words, this matter is highly suited to the discussion about what macroprudential supervision can and cannot do or, if you like, how macroprudential policy can contribute to managing the trade - off between price stability and financial stability we are facing. see oecd ( 2012 ) oecd economic surveys : sweden, oecd publishing, doi : 10. 1787 / eco _ surveys - swe2012 - en, imf ( 2013 ) sweden — 2013 article iv consultation : concluding statement of the mission, stock - holm : 31 may 2013 and european commission ( 2013 ) recommendation for a council recommendation on sweden ’ s 2013 national reform programme and delivering a council opinion on sweden ’ s convergence programme for 2012 - 2016, brussels : 29 may 2013. bis central bankers ’ speeches the countercyclical capital requirement would have been activated one way of illustrating the possibilities of macroprudential policy to limit the risks ensuing from the debt build - up of the household sector is to consider how the countercyclical capital requirement would have been used if it had been in place. this requirement involves the banks building up an extra capital buffer when aggregate lending is high. in a crisis, the banks are then able to use this buffer to stimulate lending. although this tool is not yet in place, we can assess fairly well how it would have been used historically, thanks to the fact that the basel committee has provided guidelines regarding when it is appropriate to activate the requirement. the most important