In fact, it is difficult to find any newspaper reference at all to macroprudential policy in those years. The opposite is true today. Last year there were over 350 newspaper references in the UK alone. The great financial crisis validated these ideas for many policymakers world-wide. It was clear with hindsight that we had not only mis-estimated the risks in individual institutions. More importantly, we had not really understood the risks created by the dynamics of the system including from outside the core banking system, namely the amplifiers and feedback mechanisms that drove the system down in the same way that they had driven it up. Or the devastating effect all of this would have not just on the financial system but on the broader economy. The dynamics of the system itself create risks and costs that markets and firms do not – and cannot – take fully into account in their decisions and their pricing. For example, in a financial crisis individual banks will try to cut lending – to deleverage – to preserve their funds. But if  1  See Crockett, A (2000) ‘Marrying the micro- and macroprudential dimensions of financial stability, BIS Speeches, 21 September. Also, see Borio, C (2003) “Towards a macroprudential framework for financial supervision and regulation?”, BIS Working Papers, No.128. BIS central bankers’ speeches  3  all banks do that then, as we saw, the economy will suffer which damages all banks. I suspect central banks over the centuries had an intuitive understanding of these risks.
A more restrained approach would be to use countercyclical policy not so much to lean against the cycle but to increase the resilience of the system further by putting in more protection as risks build up in exuberant times. Others remain unconvinced that there is much of a role for time-varying macroprudential policy at all and argue that it is better to bake all the necessary resilience into a very strong standing framework of standards and rules. There is certainly no easy way to estimate where we are in the credit cycle and the impact of macroprudential tools – while there are guides there are no simple rules. Against that background, I want to highlight some of the steps the FPC has taken in this area. First, using macroprudential policy to address changing risks depends upon a clear assessment of risks and of the action necessary to address them. The institutional incentives will inevitably tend to drive macroprudential authorities to the identification of all possible – and if we are not careful, some impossible – risks. Failure to spot a risk is worse than  BIS central bankers’ speeches  5  spotting one too many. The outcome of this dynamic, however, can too easily be a lack of clarity and focus: an assessment that identifies everything but actually identifies nothing. With this in mind, the FPC has changed the structure and content of its bi-annual Financial Stability Report (FSR).