over the past 130 years or so. the credit cycle is every bit as regular as the business cycle. but it differs from the business cycle in two critical respects : its amplitude is at least twice as large and its duration at least twice as long. both are important for the design of macro - prudential policy regimes. the larger amplitude of the credit cycle is one reason why credit booms have, more often than not historically, resulted in banking crises ( table 1 ). because financial crises cause large and long - lived disruption to the economy, this suggests a strong empirical link between credit cycles and macroeconomic destabilisation. or, put differently, curbing the credit cycle appears to be an important ingredient of broadly - based macro - economic stability. in principle, monetary policy could be used to curb the credit cycle. in practice, the differing duration and synchronicity of the credit and business cycles means this is unlikely to work well. pre - crisis experience illustrates well just that point. at the same time as the wider economy was operating in cruise control, credit markets were in overdrive. hitting these two birds – one flying high, the other low – with one ( monetary policy ) stone would have defied even the most astute marksman [ king, 2013 ]. what is needed, in these instances, is a second instrument. in the language of tinbergen [ tinbergen, 1952 ], two cycles and two objectives call for two instruments. this is where macro - prudential policy comes in. one of the aims of macro - prudential policy is to act counter - cyclically on the credit cycle, constraining credit booms and cushioning busts bis central bankers ’ speeches [ aikman et al, 2014 ]. in this role, macro - prudential policy is complementing monetary policy in its role of stabilising the macro - economy. macro - economic policy then becomes, in effect, two - handed or ambidextrous. since the crisis, this two - handed approach to policy has been taken up actively by a number of countries internationally [ imf, 2013 ]. for example, counter - cyclical prudential policy is now baked into new international regulatory rules. the so - called basel iii reforms introduced for the first time a “ counter - cyclical capital buffer ” ( ccb ) to be adjusted to counteract the credit cycle [ bcbs, 2010 ]. while a small step for

a significant number of new macro - prudential frameworks have emerged internationally in the past few years. in some cases, including in the uk, central banks have been handed macroprudential responsibilities. this has enabled explicit co - ordination between the monetary and macro - prudential arms when tackling the joint needs of the economy and financial system – for example, in the uk through joint meetings of the bank ’ s mpc and fpc. but in a number of other countries, responsibility for macro - prudential policy has been located outside of central banks [ imf, 2013 ]. we have a mixed model. in this institutional respect, macro - prudential policy today resembles monetary policy perhaps a generation ago. it is, of course, still early days for macroprudential regimes. monetary policy took a generation, if not two, of trial and error to find its feet. for policymakers finding their feet today, doing so will be far easier using two arms than one. bis central bankers ’ speeches chart 1 credit and business cycles chart 2 us interest rates source : bank calculations source : thompson reuters datastream ; bank calculations chart 3 us credit gap chart 4 actual and implied capital in the us sources : bis, oecd and bank calculations sources : bis, oecd, fdic and bank calculations chart 5 policy rates in europe chart 6 credit gaps in europe bis central bankers ’ speeches chart 7 bank capital ratios in spain chart 8 bank capital ratios in ireland sources : bis, oecd and bank calculations sources : bis, oecd and bank calculations chart 9 policy rates in advanced economies chart 10 real long - term interest rates source : thomson reuters datastream chart 11 covenant - lite and other highyield loan issuance in the us sources : bloomberg and bank calculations. chart 12 taylor - minsky rule for the uk source : jpmorgan chase & co. ( a ) volume as of 15 november 2013. bis central bankers ’ speeches table 1 the credit cycle and subsequent crises total peaks 1880 – 2008 * crisis years * * within 5 % peaks with crisis years within years following a peak the following 5 years aus 67 % can 55 % deu 22 % dnk 40 % esp 63 % fra 60 % gbr 78 % ita 73 % nld 13 % nor 39 % swe 40 % usa 67 % 51 % * interwar data missing for most countries. data coverage incomplete for other countries e. g. only post - 1945