financial factors may lead to recurrent patterns of booms and crises, as the famous bis central bankers ’ speeches book by kindleberger reminds us. recent examples are the japanese crisis in 1991 and the asian crisis in 1998. still, most policymakers failed to notice the development of an almost global credit boom since the mid - 1990s. many advanced countries witnessed a strong increase in credit and house prices. housing bubbles developed in countries such as the us, the uk, spain and ireland. in the euro area, the boom interacted with inflexible product - and labour markets, leading to strong wage growth and a severe loss in competitiveness. especially southern european countries had not adjusted their economies to the loss of exchange rates in the monetary union. yet all these imbalances largely went unnoticed. major changes in the economic landscape, such as globalisation, often make it difficult to spot vulnerabilities. we are lead to believe that we are in a new era, while in fact we are close to a new crisis. the consequences are familiar. almost four years after the collapse of lehman brothers, most advanced economies are still struggling. we are reminded that financial crises may lead to a longer period of relatively low growth, with japan ’ s lost decade as the most pronounced example. growth is reduced because banks remain fragile and hesitant to lend, households are saving to reduce debt, and governments are consolidating in order to counter the surge in public after the crisis. in the euro area, the situation is complicated further by the sovereign debt crisis. sovereign bonds in southern europe are under severe financial market pressure, while some countries are also experiencing capital outflow from the banking sector. meanwhile, emerging asia has remained surprisingly resilient. many asian countries had improved their economic fundamentals after the asian crisis. their exposures to the current crisis were also limited, because of lower financial integration and because their reserves were invested in safe assets. while the business cycle in these export - oriented economies is affected by demand from the west, their trend growth has clearly decoupled. emerging asia recorded an average annual growth of 8. 5 % per year over the last decade, against only 1. 7 % for advanced economies. the financial crisis has only accelerated the shift in the economic balance of power in the world, which has important consequences. it for instance changes the composition of international organisations like the imf and the bis. asia is seeking a greater say at the expense of advanced economies, especially in

5 it is a brave central banker who would deliberately induce a recession in order to head off the mere risk of a future financial correction. for instance, william white ( 2006 ), “ is price stability enough? ”, bank for international settlements working paper 205. alan greenspan ( 2002 ), “ opening remarks ” in rethinking stabilization policy, federal reserve bank of kansas. charles bean, matthias paustian, adrian penalver and tim taylor ( 2010 ), “ monetary policy after the fall ” in macroeconomic challenges : the decade ahead, federal reserve bank of kansas. bis central bankers ’ speeches that explains the interest in deploying additional policy instruments that are better suited to restraining the build - up of dangerous financial imbalances and contributing to the maintenance of financial stability – so - called macroprudential tools. with two targets – price and financial stability – one really wants another instrument, or set of instruments, to complement monetary policy. in the new arrangements established following the crisis, the deployment of such instruments falls to the bank ’ s financial policy committee. there are several potential macroprudential tools to deal with such cyclical risks, but they are of broadly two types : those that increase the resilience of the system ; and those that work pre - emptively against a build - up of leverage. in addition, measures may be targeted or more general in impact. to give some examples, first consider the basel iii counter - cyclical capital buffer, implemented in the european union under the capital requirements directive. by forcing banks to hold extra high - quality loss - absorbing capacity during a credit boom that can be released during a subsequent downturn, this primarily improves resilience. but because it raises the marginal cost of bank funds, the counter - cyclical capital buffer should also inhibit the build - up of leverage in the first place. there are several reasons why debt finance is cheaper than equity finance, including the implicit subsidy from being too big to fail, and the advantageous tax treatment of debt. moreover, debt pays the same return in all states of the world except when default takes place, while the return on equity will vary ; that makes debt more attractive for some investors, especially during financial booms when the probability of default appears low. raising the capital requirements on particular components of banks ’ balance sheets by varying sectoral risk weights is different in that it alters the relative attractiveness of different sorts of lending. assuming that the increase in capital requirements is