As a result, an attempt to prick a bubble may lead to an intervention that puts a halt to “a good boom” which would have pushed the economy towards a higher level of development. The cost of such unwarranted interventions in the form of foregone growth could be substantial.5 How to deal with the cyclical dimension of systemic risk – a macroprudential approach The immense cost of the global crisis has led to a thorough rethinking of this traditional view on financial regulation and macroeconomic policy. For instance, estimates have been provided suggesting that the cumulated output loss incurred by the recent crisis could amount to 90% of 2009 world GDP.6 Naturally enough, the afore-mentioned approach of “benign neglect” is no longer seen as an acceptable way to deal with potential excesses building up through the financial cycle. Given that the cost of inaction when imbalances develop in the credit market can be huge, a more precautionary approach is indispensable (slide 3). In general, its goal should be, first, to enhance the resilience of the financial system to adverse shocks, and second – to the extent possible – to try and preventively contain the build-up of systemic risk. This is the thrust of the macroprudential approach. For instance, in order to address the root cause of cyclical systemic risk directly, the goal of this approach should be to reduce the procyclicality of financial agents’ behaviour. Can we hope to achieve this with monetary policy instruments, or do we need new specifically designed instruments?
In addition, the effect on credit momentum of the other measures announced by the Federal Council in June 2012, namely the revision of the risk-weighting and the self-regulation rules, remains to be seen.16 Taking these issues into consideration, the SNB decided in August 2012 not to issue an immediate proposal to the Federal Council for activation of the CCB. It will reassess the situation regularly. The second key question pertaining to the functioning of the CCB is whether it is an effective instrument to strengthen the resilience of the financial system and thus help to limit negative spillovers (slide 7). The impact of higher capital ratios and more provisions on the resilience of banks is self-evident. This is also the case from a system-wide perspective. To assess the effectiveness of the CCB in strengthening resilience, we can draw some lessons from historical experience, namely the Swiss real estate crisis in the early 1990s. Internal calculations suggest that, had the proposed CCB regime been in place in the run-up to that crisis, the resilience of the system as a whole would have increased significantly. From an aggregate perspective, this additional capital would have absorbed a large portion of the losses that were reported as a result of the crisis. The third key question is: To what extent the CCB is able to contain the build-up of excesses? 13  IMF (2011), Drehmann et al (2011). 14  Namely, domestic mortgage volume indicators and domestic residential real estate price indicators.