For example, a positive supply shock – as a result of technological progress, for instance – could keep inflationary pressure low for a prolonged period. Expansionary monetary policy conditions could therefore be maintained. But if we look at financial stability, this situation entails the risk of a boom-bust cycle, which would require a tightening of monetary policy. A similar problem is conceivable if the economic outlook is so poor that raising interest rates would be inappropriate because of the risk of deflation. However, maintaining low interest rates would pave the way for potential imbalances, which – from the point of view of financial stability – would actually have to be countered by raising interest rates. Such situations make it clear that a single instrument cannot simultaneously achieve two objectives. A further problem is that a bubble is not easy to identify. Expecting us to be able to tell in advance whether damaging price imbalances are building up within certain asset classes is not realistic. First, that would require us to be better than market forces in assessing the fundamentally justified value of a specific asset. Second, it is not easy to clearly identify which variables are to be used as indicators of imbalances. A third problem is that we do not yet have any sound knowledge of the timing, effectiveness and required scope of the monetary policy response that would be necessary to counter financial imbalances.
At the same time, the risks involved in overemphasising the role of central banks in connection with such supervision and regulation also have to be borne in mind. Central banks could find themselves facing increased political pressure that could jeopardise their independence. If their credibility with regard to maintaining price stability were undermined, this could have devastating implications for the effective implementation of monetary policy. Institutional aspects And now, in the final part of my speech, I would like to look at some institutional aspects. To allow a more detailed analysis of systemic risks and how to keep them in check, we need a macroprudential framework in which various instruments can be combined to optimal effect. What is the best way of achieving this? Firstly, it is essential to recognise that ensuring financial stability as a whole is generally dependent on the decisions made by a range of different bodies. These need to act together in order to ensure financial stability. To create the necessary basis for a functioning macroprudential framework, the exact institutional set-up of the regulatory authorities is of the utmost importance. First and foremost, objectives, mandates and responsibilities need to be clearly defined. In Switzerland, for instance, FINMA – the Financial Market Supervisory Authority – is responsible for the regulation and supervision of individual banks. The SNB, on the other hand, is required to contribute to financial stability. With regard to Switzerland’s two big banks, there is a clear overlap between institutional and systemic risks.