BIS central bankers’ speeches  7  Exercising care and caution in uncharted macroprudential waters The authorities are sailing in uncharted waters when it comes to macroprudential measures. The complex interrelationships between monetary policy, traditional banking supervision and the macroprudential toolkit are difficult to assess. Consequently, we do not always know exactly how the different measures will work. The need for analysis and research in this field is correspondingly great. However, to be realistic, we will never have all the answers or be able to dispel all uncertainties, as – incidentally – is always the case in monetary policy. But this should not stop us using these instruments when we judge it to be necessary. In doing so, we endeavour to exercise the requisite care and caution. Consequently, we undertake comprehensive investigations, evaluate the results carefully and systematically, and carry out our measures based on criteria which have been specified in advance. As in the case of monetary policy, if decision-making is as free as possible from political influence and manipulation attempts, its quality will be improved. Following these thoughts, I would like to return to my initial question concerning the SNB’s role in financial stability, as a kind of interim conclusion. Central banks have always had an important role in financial stability. However, the crisis has shown that the traditional approach, which relies exclusively on the power of persuasion and the extinguishing of fires, can be very expensive.
It would be helpful if actual conversions happened reasonably frequently and not only in a rare crisis, demystifying the whole process. One  16  Admati, DeMarzo, Hellwig and Pfleiderer, 2010, “Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive,” Stanford GSB research Paper 2065. 17  Duffie, 2010, “Contractual Methods for Out-of-Court Restructuring of Systemically Important Financial Institutions”, in Ending Government Bailouts as We Know Them, Scott and Taylor (eds). Hoover Press. 10  BIS central bankers’ speeches  would also need to make sure that the maturity profile was such that no dominant amount of contingent capital was rolled at any one point in time. There could be an on-going process of monitoring, rather than particular trigger dates that may cause a focus for a “run” during times of stress. Stress tests could also be one of the tools to force conversion of contingent capital securities by bank regulators. In addition to the accounting based capital trigger, capital requirements could be expressed in terms of what scenarios a bank has to be able to withstand, with capital securities triggered when the existing common equity is not sufficient. One argument that has been raised against contingent capital, has been the lack of a natural investor base, reflecting market segmentation between “credit”, “rates” and “equity” investors. We believe strongly that market segmentation is an inefficiency which should not be taken as a given; there are already regular convertible debt securities with an investor base.