Working Paper Research - Nationale Bank van België

AbstractAmong the international policy institutions, the Bank for International Settlements (BIS) is known forits sensitivity to financial stability issues. Attention to the "macro-prudential" dimension of financialstability is very typical for the BIS. The Bank's macro-prudential approach first came to the fore inthe 1986 Cross Report. It defined the macro-prudential domain as "the safety and soundness of thebroad financial system and payments mechanism". In this paper, it will be argued that AlexandreLamfalussy, who was at the BIS from 1976 to 1993, played a crucial role in shaping the Bank'sapproach to financial stability. Lamfalussy is renowned for taking a broad macroeconomic view andfor focusing on the systemically important financial institutions, as the failure of one of theseindividual institutions would threaten the whole financial system. In Lamfalussy's view, there is thusvery much an overlap between the micro- and macro-prudential dimensions of financial stability.This paper traces Lamfalussy's analysis of financial fragility and goes into the reasons for hissensitivity to it. Among the main elements involved were: a "Keynesian" Weltanschauung (that amarket economy is not sufficiently self-correcting); the emphasis of Dupriez (his teacher in Louvain)on cycles; Lamfalussy's own experience as a commercial banker; BIS involvement in financialstability issues, especially the Latin American debt crisis of 1982-83; and research in the centralbanking community on financial innovations in the early 1980s.Key Words: Lamfalussy, BIS, macro-prudential, systemic stability, financial fragility, risk.JEL Classification: A11, B22, B32, E3, F02, G10, N10.Corresponding author:Ivo Maes, NBB, Research Department, Robert Triffin Chair, Université catholique de Louvain,HUBrussel and ICHEC Brussels Management School.e-mail: ivo.maes@nbb.be.The author would like to express his gratitude to all those who contributed to this project, especiallyJ.-P. Abraham, G. Baer, L. Bernard, C. Borio, P. Clement, H. Famerée, R. Gomez, M.-H. Lambert,A. Lamfalussy, W. McClam, V. Périlleux, J. Smets, T. Timmermans, J. Toporowski and participantsof the 6th Storep (Firenze) and 36th HES (Denver) conferences.The views in this paper are those of the author and do not necessarily reflect those of the NationalBank of Belgium or the Eurosystem. All remaining errors are the author's responsibility.NBB WORKING PAPER No. 176 - OCTOBER 2009