The adequacy of such measures has yet to be seen, but the swift and proactive response of policy makers is a positive step forward, as the most recent events have clearly demonstrated that it is likely to cost less to undertake preventive measures prior to a crisis than to clean up in its aftermath. Of course, economic conditions and institutions differ across countries. An effective macro prudential tool in one country might not work in another country. Therefore, policy makers need to take country specific factors into account in designing their own framework. It is also imperative for the academic community and international organizations to focus on this issue and develop a set of concrete policy tools that national authorities, at their own discretion, can use to identify, assess and manage systemic risks. Financial stability and central banks The critical importance of financial stability from a central bank’s perspective is not new. Smooth functioning of the financial system and payment mechanism has been a concern of central banks since their foundation. In fact, that is the reason they are called as “the bank of banks” or “the lender of last resort” for financial institutions. However, over time as the financial system gets more complicated and expanded exponentially, its supervision and regulation has been partially transferred to other institutions.
Philipp M Hildebrand: Financial Stability and Hedge Funds: Effective and Ineffective Supervision Speech by Mr Philipp M Hildebrand, Member of the Governing Board of the Swiss National Bank, Diskussionsforum «Nachbarn Deutschland-Schweiz: Impulse für die Zukunft», Berlin, 9 November 2005. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). *  *  *  The hedge fund industry has grown rapidly over the past few years and it has become an important segment of global financial markets. The possibility to use leverage and a high degree of flexibility are key elements of a broad range of investment strategies which have made the hedge funds industry very profitable. Hedge funds have been an important source of innovation in the traditional asset management industry and they have rendered financial markets more liquid, more efficient and more flexible. Nonetheless, the rapid growth of the industry and the excessive use of leverage may result in potential systemic risks which are relevant to central banks, unlike prudential matters. Overall, industry leverage is difficult to measure. However, several studies suggest that it is lower than at the time of the near collapse of LTCM in 1998. Even so, temporary excessive levels of leverage with single hedge funds can not be ruled out completely. A crisis in the hedge fund industry might therefore spill over to their primary trading partners, the major investment banks.