In particular, the Bank for International Settlements had maintained since the early 2000s that, in specific circumstances, central bank conduct in the face of severe risks to financial stability would have to be pre-emptive and not only reactive. Simply put, the damage wielded by a financial crisis might be so great that some price stability slippage in the present would be  BIS central bankers’ speeches  1  warranted in exchange for preventing a future, more serious deviation that might prove more difficult and costly to reverse. The Bank for International Settlements also asserted that the combination of a price stabilityoriented monetary policy and a merely micro-prudential supervisory policy did not ensure the stability of the financial system as a whole. In this connection a third tool was needed: a macro-prudential supervisory policy. While it is still too early to draw all the economic policy lessons arising from our experience of this crisis, I believe certain necessary changes can be discerned. Among these, the need to pursue macro-prudential policies is one of the most evident implications. Macro-prudential policy The crisis has demonstrated that the previous combination of monetary policy and microprudential policy is insufficient both for shoring up the stability of the financial system as a whole and for ensuring, in the event of crisis, that the impact on the real economy is limited. To achieve these goals a macro-prudential policy is also needed, and it must be equipped with new objectives and instruments.
There is already some agreement on the need to have this new macro-prudential policy rest on two levels or dimensions. First, a cross-sectional dimension, focused on controlling the distribution of risks within the financial system at each point in time. This requires analysis of how institutions interact and what are the consequences of these interactions for the system as a whole. The aim should be to identify those interactions of most global systemic significance in order to subject them, logically, to more demanding soundness requirements. Further, macro-prudential policy should also heed the time dimension, which analyses how aggregate risk evolves and how it interacts with the normal functioning of the real economy. This is the perspective needed in order to design, for example, measures to temper the procyclical tendencies inherent in the financial system. As is known, the Banco de España was a pioneer in this field when, in 2000, it introduced dynamic provisioning. In the initial stages of the crisis the potential of such a tool was evident; however, the subsequent heightening of the crisis also showed its limitations. The interactions between monetary and macro-prudential policy will pose complex challenges to central banks. Theoretically, monetary policy should continue focusing on maintaining price stability; and macro-prudential policy, on ensuring financial stability. In practice, however, action by each of them will inevitably exert a strong influence on the objectives of the other, and that has implications for the institutional design of the macroprudential authority.