of real importance. for policy makers, the important question is whether we can identify a combination of events in the financial and / or real sectors, which expose the financial system to a significantly increased level of risk. a financial crisis can make it very difficult to maintain price stability. this is demonstrated by the fact that all major deflations in the world were related to substantial falls in the following draws on pastor and veronesi ( 2004 ). the most usual definition of bubble used in economic research defines it as the part of asset price movement that is unexplainable based on fundamentals. see peter garber ( 2000 ). see leroy ( 2002 ). see trichet, 2003. goodhart, 2005. e. g. weber, 2005. asset prices. the growing academic literature on early warning signals already provides some progress. researchers from the bank for international settlements and the european central bank in two separate studies illustrate this point. it has been shown that an indicator defined to provide a warning signal when both the credit to income ratio and real aggregate asset prices simultaneously deviate by 4 percentage points and 40 % respectively, from their trends, would have predicted 55 % of financial crises three years in advance. 9 the likelihood that this indicator triggered a false alarm has been at least historically very small ( around 3 % ). considering deviations of the credit to income ratio beyond a threshold of 4 percentage points alone as warning signal, would have predicted even 79 % of financial crises, although in this case the indicator would have provided a false warning signal in 18 % of times. 10 in another paper, ecb staff found that defining asset price booms as simple deviations from trend beyond a given threshold11 and classifying the resulting boom periods in high - cost and low - cost depending on the depth of the post - boom recession, broad money and credit developments are among the few early indicators of high cost asset price boom periods. 12 i consider it the duty of central banks to communicate the results of their analysis with regard to financial stability and potential risks for the financial system and the economy as a whole to the public. this conviction is shared by many of my colleagues as can be seen by the increasing number of financial stability reports published by major central banks, including the ecb. another example is the financial stability forum, which convened in 1999 and brings together on a regular basis national authorities responsible for financial stability in significant international financial centres, international financial institutions, sector - specific international groupings of regulators

andreas dombret : what does good macroprudential regulation look like? speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the icfr ( international centre for financial regulation ) annual international regulatory summit, berlin, 19 october 2011. * * * introduction good regulation has a great number of facets. i am impressed by how many of these the organisers successfully included in their conference programme, and i wish to thank the icfr for inviting me to offer my views on good macroprudential regulation. the theme of this session is very topical : it does have long - term as well as short - term aspects. most of my speech will focus on the importance of good macroprudential policies for achieving and securing the long - term stability of the financial system. but i will, later on, also comment on current developments and the need for a macroprudential design in the present crisis management. macroprudential policy is much talked about, but it may not always be clear what the term exactly stands for. i doubt its definition has already been set for good and for all. having been in investment banking before joining the bundesbank, i actually hardly ever used to think about macroprudential policy measures – something that has quite changed since then. to explain it in a few words : macroprudential oversight is supposed to complement microprudential regulation and supervision – macroprudential policies increasing prudence with respect to the financial system, microprudential policies with respect to single institutions. to explain it at more length : the main objective of good macroprudential policy is to enhance financial stability by applying supervisory and regulatory tools. we want the financial system allocating financial resources and risks efficiently at all times, ie also in times of stress. however, in the event of a malfunctioning of the system, the economic and social costs should be as low as possible. mitigating systemic risk is crucial for maintaining financial stability and for minimising the costs of stress. addressing systemic risk, macroprudential policy rests on three pillars : first, the strengthening of risk absorbency for systemic risk ; second, necessary changes to the regulatory framework ; and third, a forward - looking design of crisis management. these three pillars appear powerful and effective. however, in order for macroprudential policy to run smoothly, an adequate macroprudential mandate has to be defined. macro