And experience has shown that price stability – their primary mandate – does not always coincide with financial stability and the avoidance of bubbles. Furthermore, in an integrated financial system, judgments have to be made on a worldwide basis. Another alternative is the IMF. But the IMF is mostly controlled by governments and decisions are made according to voting shares. Implementing macrosupervision will involve delicate decisions (like strengthening lending standards in good times) to which governments may not spontaneously agree. A fully independent body would certainly be necessary. Second, how is that judgment passed on to regulators and supervisors and translated into supervisory decisions. This is totally unchartered territory. I would just mention it as a matter for future research in the governance of the financial system. The instruments The most important instrument in our current toolkit are capital requirements put on some financial intermediaries. Those capital requirements perform a dual function. They act as compulsory buffers imposed on banks and their shareholders. They also have an incentive function: to prevent  4  BIS Review 37/2009  shareholders from taking too much risk with deposits. It has proven more and more difficult to reconcile those two objectives. In theory it could be done, just as taxes can be used both to raise revenues and allocate resources. But, in practice, they both may be lost into an increasingly complex system. In addition, capital requirements may not be binding when they need to.
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