control ), linked by a forecasting framework and an understanding of the feedback between instrument and objective. this broad schema has been thoroughly researched, and lies behind much of the thinking in actual monetary policy decision processes. there is also a well understood case for independence of the monetary bis central bankers ’ speeches policy process, and for transparency and clarity of objectives which has been widely built into institutional structures around the world. it strikes me that there is nothing commensurate with this schema in the field of financial stability policy. instead of a single instrument, we have a multiplicity of instruments ( e. g., capital rules, some of which may be time varying, risk weights, lvrs, liquidity rules, infrastructure requirements, supervisory intensity ) whose effects are difficult to quantify. and the objective of financial stability has no simple metric. it can ’ t be summarised in a continuously observed number like the inflation rate, though obviously we know financial instability when we see it. further, as i have argued, there is no single best practice model for the design and allocation of decision - making powers. the obvious conclusion is that the pursuit of financial stability is a much more subtle and complex undertaking than the traditional monetary policy function of central banks. it necessarily involves not just quantitative frameworks, but detailed surveillance of risks guided by the perspective of historical experience. i expect these are things that central banks will be devoting increasing attention to in the years ahead. i want to finish by emphasising two elements that must be at the core of effective macroprudential policies, regardless of the institutional arrangements in a given country. the first is effective cooperation between those involved in traditional central bank activities and bank supervisors. combining these functions in an expanded central bank is not in itself a guarantee of effective coordination, though it may obviously help. key aspects include an effective flow of information across staff in the market operations and macroeconomic departments of a central bank and those working in the areas of financial stability and bank supervision. regular meetings among these groups to focus on risks and vulnerabilities and to highlight warning signs can be very valuable. a culture of coordination among these areas is very important in a crisis because, in many instances, a stress situation is first evident in liquidity strains visible to the central bank, and the first responses may be calls on central bank liquidity. the second element is effective bank supervision. by this i mean not just the standards and regulations but the capacity of supervisors to

i would like to say a little more about it today and will divide the subject into two aspects : the shorter - term cyclical fluctuations in household credit growth, and the fact that various debt ratios have trended upwards over time. regarding the first of these issues, the most recent cyclical peak in household credit growth occurred around the end of 2003, when it reached an annual rate of over 20 per cent. since the bulk of household borrowing is housing - related, it is not surprising that this phenomenon was closely associated with a sharp run - up in house prices. nationwide house prices increased strongly for several years up to late 2003, reaching a peak growth rate of around 20 per cent in that year. the increases in credit and house prices were inter - related, with credit availability fuelling the price rises, while rising house prices meant people had to borrow larger amounts to achieve home ownership. much of this behaviour was driven by expectations, particularly in the investor market, of future price gains – the classic definition of bubble - like behaviour. in the period since late 2003, both the housing market and the demand for credit have cooled. nationwide house prices have been broadly flat over the past two years and prices have fallen in sydney. household credit growth has eased back to an annual rate of around 12 per cent. although this might still be regarded as quite high in absolute terms, it is towards the lower end of the range in which it has fluctuated in the past two decades. while there are some tentative signs that credit and housing market conditions have firmed a little in recent months, the risks to the economy posed by the over - heating in housing and credit markets in the period up to late 2003 have eased. households now seem to have entered a period of greater financial caution, and this may act as a restraining influence on the growth of household spending for a while to come. the second issue is the high average growth rate of household credit over an extended period. this is a longer - run issue and one on which it is more difficult to make firm judgments. for more than a decade, household indebtedness has grown at a rate well in excess of the growth in household incomes. this has meant that the aggregate ratio of household debt to household income has trended upwards, as has the proportion of household income required to service the debt, and the gearing ratio ( debt to value of household assets ). simple rules of thumb would suggest that this cannot be sustained indefinitely. yet there are a number