In a possible downturn, authorities can release the CCyB, as many did during the pandemic, freeing up capital that banks can use either to absorb losses or to lend to the real economy. This mitigates the likelihood of a downward spiral of emergency credit  2  At the end of 2020, total banking sector assets stood at roughly CHF 3,800 billion. This is equivalent to around 500% of Swiss GDP – a high ratio by international standards. tightening. Finally, the activation of a CCyB could increase lending costs and reduce credit growth, thereby dampening the build-up of vulnerabilities. In theory, the range of feasible instruments is broad. In practice, the design and character of macroprudential instruments are typically adapted to country-specific circumstances in order to increase their acceptance and effectiveness. Let me explain how we have achieved this in Switzerland. In Switzerland, three agencies share a mandate to contribute to financial stability: the SNB, the Swiss Financial Market Supervisory Authority (FINMA), and the Federal Council and administration. These authorities have directly involved banks in the design of macroprudential instruments. In fact, the borrower-based instruments implemented in 2012 build on a pre-existing tradition of qualitative self-regulation guidelines of the Swiss Bankers Association concerning mortgage lending. Authorities and banks have worked together to complement these qualitative guidelines with quantitative requirements concerning the degree and speed of amortisation and the necessary down payments by borrowers. These quantitative guidelines serve now as minimum standard requirements.
In doing so, it has blurred the information content of many important variables or indicators relevant for the monetary policy maker, making monetary policy probably more complex in a context of increased uncertainty. Economic theory usually distinguishes between parameter and model uncertainty. In the presence of parameter uncertainty, i.e. when the policy maker is uncertain about the impact a policy instrument has on the economy, economic theory suggests that it is optimal to respond more cautiously than would be the case in the absence of uncertainty (this is the well-known Brainard conservative principle). By contrast, model uncertainty would require more active monetary policy, the idea being to insure oneself against particularly bad outcomes. I will leave it to your wisdom to guess in the present circumstances which of these two approaches would be preferable. Thank you for your attention. 5  Bordes, C., Clerc L. and Marimoutou V. (2007): “Is there a break in equilibrium velocity in the euro area?”, Banque de France, Notes d’Etudes et de Recherche n° 165, February. 4  BIS Review 103/2007