The most important indicator in this assessment is the credit gap, which is a measure of how much credit growth deviates from its long-term trend. The reason for the credit gap having gained a key role in the assessment is that it has proven to be the indicator that warns of an impending crisis best and sufficiently early. A pure mechanical application of the credit gap can provide a certain guide to when the capital requirement would have been activated (see figure 1).6 Figure 1. Time periods when countercyclical capital buffers should have been activated based on historical measures of the credit gap (per cent). 3  2,5  2  1,5  1  0,5  0 81  83  85  87  89  91  93  95  97  99  01  03  05  07  09  11  Countercyclical buffer Households Non-financial corporations  Note: The calculations are based on a mechanical application of the credit gap approach. We can see that the requirement would have been activated on two occasions. The first time would have been a few years before the banking crisis of the 1990s, and the second time around 2005, that is just before the global financial crisis. We can also see which lending makes the credit gap grow by applying the approach separately to different sectors. The driver of activation of the capital requirements in the 2000s is mainly the household sector.
Lending and the building up buffers among both lenders and borrowers then stabilises over time. I would like to emphasise that this is a highly simplified description of financial stability, which to a certain extent disregards the structural aspects of systemic risk such as resilience and risks in financial infrastructure on the one hand, and such factors that trigger financial crises on the other. However, even the simplified picture gives important insights. The new tools being developed and the old tools which can be used for a new purpose are crucial to the success of macroprudential policy. Allow me therefore to discuss macroprudential policy tools and how they are intended to function. Macroprudential policy tools and how they fit in with monetary policy Typical macroprudential policy tools are capital and liquidity requirements chiefly focused on banks and the supply of credit. However, it’s also about measures to limit demand, such as the mortgage cap, or the regulation of exposures and haircuts with the purpose of limiting the contagion risk in the financial infrastructure. The various tools can be divided into static and time-varying tools. Using my simple lending rate formula, I will illustrate how, in different ways, these tools affect lending rates and credit terms. That is, after all, partly their purpose. However, this also has consequences for monetary policy.