The large cost of the recent crisis in terms of social welfare has made it clear that more effort needs to be invested in preventing such events altogether. The framework’s second deficiency was that it missed out an important dimension of risk. Because it focused on preventing distress at individual financial institutions (microprudential regulation), the framework failed to capture the build-up of financial-system-wide risk. This “systemic risk” can arise from two sources. One is financial institutions that are either so large (think UBS or AIG) or so interconnected (think Lehman Brothers or Bear Stearns) that their failure would threaten the stability of the entire financial system. In this regard, the failure of Lehman Brothers has demonstrated just how real the problem is. The other source from which systemic risk can arise is small financial firms who, by acting together and procyclically, amplify booms and busts in financial markets. 4  BIS central bankers’ speeches  Addressing systemic risk directly requires a specific set of instruments, so-called macroprudential tools, which were first discussed more than a decade ago. 9 In terms of systemic risk, these tools fall into two broad categories. The first category is tools which aim to strengthen institutions that are systemically important because of either their size or their interconnectedness. An example is the Swiss ‘too big to fail’ legislation. The second category of tools aims to enhance the resilience of the financial system and to limit the procyclicality of financial institutions’ collective behaviour.
Jean-Pierre Danthine: Are central banks doing too much? Translation of a speech given in French by Mr Jean-Pierre Danthine, Vice Chairman of the Governing Board of the Swiss National Bank, at the Foire du Valais, Martigny, 9 October 2014. *  *  *  The speaker thanks Fabian Gunzinger for his valuable support in drafting this speech. He is also indebted to Irma Cruz, Till Ebner, Peter Kuster, Claudia Strub and the SNB Language Services for their assistance. Introduction In recent years, central banks have been active in their attempts to mitigate the financial crisis and its aftermath, and they have also assumed a more prominent role in the regulatory efforts to prevent similar crises in the future. This has led many commentators to ask the question I raised in the title of this speech: are central banks doing too much? The short answer to the question – you may not be surprised – is “no”. The measures which central banks have taken since the beginning of the financial crisis in 2007 are a direct consequence of the severity of the crisis itself. First, conventional central bank measures – cutting interest rates, providing liquidity and acting as lender of last resort – were required to prevent the collapse of the financial system. Second, the use of various unconventional measures was a responsible step to support weak recoveries, given the shortage of available alternatives.