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

a success. supporting the weak recovery : unconventional monetary policy once central banks had lowered nominal short - term interest rates all the way to zero, they hit a natural limit at which conventional monetary policy becomes powerless. their decisive reaction, together with fiscal policy measures by governments, had succeeded in stopping the free - fall, but economies were still weak, unemployment rates high, and recoveries feeble. more action was clearly required. conventional economic wisdom asserts that at the zero lower bound fiscal policy is the most effective lever on which to act. unfortunately, most governments perceived themselves unable to do more for a variety of reasons. most importantly, many governments entered the crisis with high levels of public debt and, with the crisis already putting pressure on their budgets, they were reluctant to spend yet more. so even after having exhausted their conventional policy tools, central banks found that they were the only ones left to support weak recoveries. with many of them mandated to react to below - potential output, they turned to unconventional policies. 5 while their motives were somewhat different, all the major central banks resorted to either one or both of two measures : quantitative easing – the large - scale purchase of long - term securities, and forward guidance – the commitment to keep short - term interest rates low for a eichengreen and o ’ rourke ( 2010 ). liquidity provision to distressed financial institutions typically occurred in the context of state intervention and state capital injections to ensure the solvency of these institutions. in switzerland, the snb acted as lender of last resort by providing liquidity assistance to ubs in october 2008, once the bank ’ s solvency was guaranteed by a capital injection from the swiss government. friedman and schwartz ( 1963 ) argue convincingly that it was the reduction in the money supply that caused the large drops in output and prices between 1929 and 1933, and that this drop in the money supply was amplified by the large - scale bank failures in that period, which the fed did not prevent through lender of last resort action. the path was not entirely untrodden : in the 1990s, japan was facing weak growth and the threat of deflation in the wake of its asset price crash, even though the bank of japan ( boj ) had slashed rates to zero. the boj thus started to experiment with unconventional monetary policy measures. bis central bankers ’ speeches certain period of time. both of these tools are intended to lower long - term borrowing rates and, through that channel, to stimulate economic