Philipp M. Hildebrand1 Dear Svein,
Let me first of all thank you for inviting me to this splendid farewell confe-rence. I am honored and very pleased to be here. This symposium has asked us to reflect on the question of “what is useful central banking?” Needless to say, one can easily imagine a number of long-winded answers to this simple ques-tion. Alternatively, I can imagine an exceedingly simple answer, namely: pret-ty much what Svein and his colleagues at Norges Bank are doing.
Seriously, Svein, let me commend you and your colleagues for a job extremely well done. Much like we do in Switzerland, you have conducted monetary policy for a small country with a highly competitive economy and a currency subject to the sometimes volatile and excessive pressures of the global market place. Given these similarities, it should not surprise you that Switzerland looks to Norway for inspiration. Svein, I have tremendously enjoyed the privi-lege of being your colleague and wish you much success and satisfaction in the years to come. I am confident that our paths will cross again in the not too distant future.
Now, our panel is meant to address the question of where central banking will go from here. Therefore, allow me to focus my comments on one important challenge that will likely face many of us in the aftermath of the Great Finan-cial Crisis, namely how to reposition our central banks going forward to ad-dress adequately the seemingly inevitable macro-prudential policy challenges.
It seems to me that proliferating and in-depth reflections about macro-prudential policies are not just a passing phenomenon. They reflect the fact that one of the key lessons of the Great Financial Crisis is that policy makers
1Philipp M. Hildebrand is Chairman of the Governing Board of the Swiss National Bank.
in the Atlantic world have not paid sufficient attention to the macro-prudential character of their financial stability activities. By the latter I mean activities that focus on the system as a whole and take individual banks or financial in-stitutions into account only to the extent that they are systemically relevant.2 We clearly have lots to learn about how best to deploy macro-prudential poli-cies. The challenges are vast: excesses in our economies, in our banking sys-tems and in our financial asset markets will first have to be correctly identi-fied.
We will then have to decide what instruments might be appropriate to deal with such perceived excesses or imbalances. Moreover, we will have to face the difficult task of determining the appropriate timing and the right dosage in the deployment of macro-prudential tools. Finally, we will have to be extreme-ly mindful of the interaction between macro-prudential policies with anti-cyclical character and the transmission channel of traditional monetary policy.
In other words, a huge amount remains to be done and we must do it right.
Learning is a key element in this process. Today’s symposium provides such an opportunity to learn. The starting process will be different from one central bank to another, depending on the histories, the respective experiences during the crisis and the legal and operational set ups and mandates. There is unlikely to be one answer that fits all. Yet I suspect in ten years time, looking back at this moment, there will have been considerable conversion around some gen-eral principles. Let me spend a few minutes on how our own broader thinking about macro-prudential policies is evolving at the Swiss National Bank and how we plan to move forward in this area.
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For background, it is important to keep in mind that since the introduction of our new central bank law in 2004, the SNB has a legal mandate to contribute to financial stability. In contrast, we currently have no formal competence in the area of banking supervision.
2Essentially SNB definition but compatible with BIS in BIS Quarterly Review, March 2009.
Clearly, this model was put to a severe test during the financial crisis. What is striking about our crisis experience is that our legal mandate was sufficiently broad to allow us to do play a key role in a far-reaching set of measures to-gether with the government and FINMA, the Swiss supervisory agency, to rescue UBS and stabilize the Swiss financial system.
At the same time, a clear and unequivocal lesson has crystallized. There is obviously a large gap between the role the SNB was forced and legally able to play in its real-life crisis management and the absence of any specific formal competence in matters of crises prevention. Very broadly speaking: from this experience and going forward, we see the need for two areas of reform:
First, we believe our financial stability arsenal needs to be enhanced. It should be geared towards augmenting the resilience of the banking system and mod-erate its pro-cyclical behavior. In other words, given the inevitable role as lender of last resort the SNB will play during a severe crisis and given the fact that the legal mandate clearly provides the SNB with the authority to play that role, it seems self-evident that the SNB must also play a role in reducing the probability of crises emerging in the first place. Macro-prudential supervision which is at the interface between micro-prudential supervision and monetary policy has a key role to play here.
Second, after careful deliberation, it is our sense that in order to be able to play that role, the formal legal competences of the SNB in the area of prevention need to be enhanced carefully. Accordingly and in line with reflection on this topic at the international level, we will work towards achieving that objective.
Let me add here that the BIS has been an important intellectual catalyst in this area.
We believe these enhanced competences should be built on two pillars:
First, going forward the SNB should be in a position independently to have access to bank data that is essential to conducting ongoing and adequate finan-cial stability evaluations. Clearly, the fact that the SNB does not have the au-thority independently to collect data from the systemically relevant banks was a key weakness in our ability to work preemptively in the run-up to the peak of the crisis.
Second, the SNB should have a more formal role to play in proposing or de-ciding on regulation that clearly impact financial stability (e.g. capital sur-charges - in particular Basle III countercyclical buffer, TBTF, interbank-exposures, LTVs). This should be particularly true in the case of regulatory initiatives that aim to reduce the potential pro-cyclicality of the banking sector as these have specific links to monetary policy.
I should add that it is our conviction that we should seek these changes going forward without modifying the formal monetary policy mandate of the SNB.
As Governor Zeti has mentioned, safeguarding price stability must remain the key objective of the SNB’s monetary policy mandate.
We also see no need at this stage to seek a fundamental overhaul of the model of separation between the SNB and FINMA (since 2007, the SNB and FINMA already operate under a Memorandum of Understanding). I see three reasons to steer away from this discussion. First, I am convinced we should have no illusions about there being a perfect model. Second, it seems to me the risk of an integrated model surely must be that, over time, the independence of mone-tary policy can be undermined. Third, from a purely pragmatic point of view the task of integrating supervisory and monetary policy functions is a huge task. At least potentially, such a task could prove to be a significant distraction at an inopportune moment for monetary policy.
To conclude, it is profoundly in the interest of the SNB to have a strong and effective regulator who is focused on effective, intrusive and far-reaching mi-cro-prudential supervision. However, such mimi-cro-prudential supervision is not enough. Someone must keep an eye on and assess the risks at the systemic level. By design, by experience and by trial and error, central banks are best equipped to do so. But if central banks are to play that role effectively, they must be equipped – both in terms of mandate and tool box – to do it properly.
The worst combination would be an implicit or explicit expectation that the central bank fulfills that role but is deprived of the appropriate mandate and the necessary instruments to do so. That is an outcome, central banks all over the world must avoid at all cost.