failure of lehman brothers has demonstrated just how real the problem is. the other source from which systemic risk can arise is small financial firms who, by acting together and procyclically, amplify booms and busts in financial markets. bis central bankers ’ speeches addressing systemic risk directly requires a specific set of instruments, so - called macroprudential tools, which were first discussed more than a decade ago. 9 in terms of systemic risk, these tools fall into two broad categories. the first category is tools which aim to strengthen institutions that are systemically important because of either their size or their interconnectedness. an example is the swiss ‘ too big to fail ’ legislation. the second category of tools aims to enhance the resilience of the financial system and to limit the procyclicality of financial institutions ’ collective behaviour. the countercyclical capital buffer, which is currently activated in switzerland, is an example of such a tool. in short : we have learned that system - wide financial crises can be very costly, and that we should focus on preventing rather than managing them. there is also a broad consensus that we require macroprudential tools to address systemic risk directly. one last question remains : why should central banks play an important role in implementing these tools? there are four main reasons. first, as lenders of last resort, central banks are the ultimate providers of liquidity to the economy in times of financial stress, and thus play an important role in managing crises. but these operations are not without risks, so that central banks have a particular stake in preventing such situations. to do that, they need the appropriate tools. second, financial stability is a critical precondition for central banks ’ ability to fulfil their primary mandate of ensuring price stability. financial instability can distort prices directly, and it can impair the proper functioning of monetary policy transmission mechanisms. third, macroprudential and monetary policy tools interact, in the sense that the use of one may have an effect on the use of the other – for example when low policy interest rates not only stimulate economic activity ( as they should ), but also translate into an excessive reach for higher yields in financial markets, thereby contributing to the build - up of systemic risk, which in turn justifies the tightening of a macroprudential tool. in such a case, the chances of achieving the best policy mix are higher when macroprudential and monetary policy tools are well coordinated

philipp hildebrand : swiss monetary policy and financial markets summary of a speech by mr philipp hildebrand, member of the governing board of the swiss national bank, at the autumn forecast of the swiss institute for business cycle research, zurich, 5 october 2006. the complete speech can be found in german on the swiss national banka€™s website ( www. snb. ch ) * * * transparency and communication enhance the impact and the precision of monetary policy. monetary policy functions through expectations. this means that it is first and foremost expectation management. central banks strive for transparency regarding their methods and approaches. all in all, the current economic and, in particular, the structural uncertainties are resulting in a greater range of possible economic scenarios and thus also in an increase in the range of expectations regarding our future monetary policy. in other words, being transparent does not automatically mean being predictable. therefore, the swiss national bank ( snb ) considers it particularly important to communicate its monetary policy concept to the markets and the public. this allows them to arrive at similar conclusions to those reached by the snb.