Overly stringent regulation normally leads to more expensive financial services, which affects resource utilisation. The stringent regulation of financial markets in the 1960s and 1970s gave us a relatively stable financial system, but at the expense of efficiency. On the other hand, deregulation brought about developments on financial markets which created a “seemingly efficient” system, but which gave rise to major risks to stability. The development over recent years has shown just how closely interlinked the tasks of the central banks are. For example, the emergence of a situation of financial instability also has  BIS central bankers’ speeches  1  repercussions for both inflation and resource utilisation. This illustrates that it is not possible to conduct monetary policy and financial stability policy completely separately. Differences in time horizons give rise to trade-offs We can also describe the central banks’ conflicting objectives in terms of different time horizons. For monetary policy, the time horizon is usually two to three years, which is reasonable in light of how the business cycle usually varies. However, we know from experience that financial imbalances and risks in the financial system are built up over a much longer period of time, which can include several business cycles. These longer periods are usually described in terms of so-called financial cycles. There is no established method of measuring the financial cycle, but lending rates, credit terms and asset prices are common indicators.1 So, the financial cycle has its up- and downturns just like the regular business cycle, but is often more protracted.
However, such time-varying regulation also contributes to stability by increasing the costs of borrowing when credit growth and other financial variables suggest that systemic risk has increased, and reducing the interest rate margin in financial crisis situations when the buffer can be used. We can illustrate the time-varying part by adding a time index also for the regulation variable ( z ):  itlending  it   t ( zt ) . If time-varying regulation is introduced, the variations of the interest rate margin will be different over time, which can affect the monetary policy transmission mechanism. At the same time, a central bank must, irrespective of macroprudential policy, understand how the financial sector determines various financial prices in order to understand how monetary policy affects the economy through the lending rate. Credit markets are often not entirely homogeneous, but consist of several different segments or sectors. The development within different sectors can vary tremendously. Although many other factors affecting the lending rate and other credit terms are of an aggregate nature, sector-specific factors are often important too. It is therefore important to have a macroprudential policy tool focusing on individual sectors. This is not least important in attempting to reduce the costs of leaning into the wind.