t preceded by an unsustainable boom in output. in the five years leading up to the crisis, overall gdp growth remained close to its long - run average and inflation differed from the 2 % target on average by only 0. 2 percentage points. diverting monetary policy from its goal of price stability risks making the economy less stable and the financial system no more so. to argue that monetary policy should be directed to counter inadequately priced risk is to argue that unemployment is a price worth paying to tame the banking system. inflation targeting is a necessary but not sufficient condition for stability in the economy as a whole. when a policy is necessary but not sufficient, the answer is not to abandon, but to augment, it. indeed, the overarching lesson from this crisis is that the authorities lacked sufficient policy instruments to take effective actions. nowhere was this more evident than in dealing with northern rock in the absence of proper resolution powers. for domestic institutions that particular issue was settled by the banking act 2009, and the new resolution powers were successfully deployed by the bank to deal with the dunfermline building society in march. what other powers are required? there is a broad consensus that our traditional policy instruments need to be augmented by a “ macro - prudential ” toolkit. but what are such “ macro - prudential ” instruments for? are they to increase the resilience of individual banks, or are they to protect the economy from the banks? the former implies a sensible extension of the current regime of capital requirements for individual institutions. the latter goes to the heart of the problems caused by the financial sector as a whole for the rest of the economy. we need to reflect more deeply on the nature of the failures before designing a regulatory response – after all many financial markets continued to function well. but banks entered the crisis with historically low levels of liquid assets, and inadequate levels of capital with which to absorb losses. moreover, in the united kingdom, the financial sector became too big and too highly leveraged. first, the size of our banking system was, as a proportion of gdp, five times that in the united states, and the risks to the uk taxpayer correspondingly greater. second, the process of reducing very high leverage is doing great damage to the rest of the economy. and the required adjustment still has a long way to run – few of the largest banks in the united kingdom managed to reduce their leverage ratios through 2008, which remain at historically high levels. third

this is the case, each policy area can take the other for granted. macroprudential policy is aimed at counteracting risks in the financial system as a whole, and is a policy area for which many countries are now trying to set the framework. 2 exactly how these frameworks will look is still somewhat unclear, but a few general principles have crystallised as regards both appropriate institutional structures and which instruments it may be appropriate to use. 3 finansinspektionen already has instruments at its disposal that are focused on the health and behaviour of individual participants and companies. but one important lesson of the crisis is that this is not enough. our toolkit needs to be complemented with tools that can focus on the system as a whole. today, i will discuss what such a swedish toolbox for macroprudential supervision could include. the speech “ macroprudential policy and clear communication contribute to financial stability ” was held at the swedish bankers ’ association on 30 march 2012. see www. riksbank. se. for more detailed analyses of macroprudential policy and its ability to counteract systemic risk, see, for example, borio ( 2010 ), galati and moessner ( 2011 ) and vinals ( 2010 and 2011 ). see, for example lim, c., et al., ( 2011 ), ” macroprudential policy : what instruments and how to use them? lessons from country experiences ”, imf working paper, 11 / 238. bis central bankers ’ speeches different types of risk … before i go into the different types of tools that could be used to manage systemic risks, i will explain what is meant by systemic risk. the riksbank usually defines systemic risk as the risk that a shock will occur in the financial system, leading to substantial costs for society. 4 such risks can arise for various reasons. the crisis and the period before the crisis clearly illustrate the tendencies towards exaggerated cyclical behaviour that often characterise the financial markets. in periods of strong growth, there is usually an increase in demand for loans for corporate investments and property purchases. it also seems to be common for awareness of risks to decrease during such an upturn. lenders often relax requirements for creditworthiness at the same time as they often take on too much debt themselves. when problems subsequently arise as a result of some borrowers finding it difficult to repay their loans, there can be an overreaction in the other direction, with