An Interview by Signe Krogstrup, Swiss National Bank and Adviser to Philipp Hildebrand

Philipp Hildebrand, Vice-Chairman of the Swiss National Bank since 2007, took up his new position on 1 January 2010, when the current incumbent, Jean-Pierre Roth, alumnus of the Graduate Institute retired. Philipp Hildebrand, also alumnus and former Visiting Lecturer at the Institute, calls for improved macro-prudential supervision and regulation of the financial sector to protect against impacts of future economic crises.

When did you attend the Graduate Institute, which programme did you follow and what are your fondest memories from those years?
I attended the Institute from 1988 to 1990 and graduated with a DES in International Relations. I have many fond memories from those years. What stands out most is probably the wonderful collegiality and friendship that characterised our class.

How do you think your years at the Institute influenced your subsequent career path?
My years at the Institute have influenced my career path in many ways. Most importantly, I became deeply committed to pursuing a professional path, be it academic or otherwise, with a firm focus on global issues.

Do you expect that the international experience gained at the Institute will be useful to you in your new role?
I have always been deeply convinced that an international outlook is indispensable for policy-makers in small open economies such as Switzerland. The Swiss economy is strongly impacted by developments in the rest of the world. The current crisis is a case in point, both in terms of its repercussions on our banking system and the recessionary fallout in the economy. One of the downsides of being small is that we cannot directly affect economic developments in other countries. Therefore, we have a tremendous interest in effective international economic governance and cooperation. In this respect, my previous international experience will hopefully be of service in my future position at the helm of the SNB.

You mention the challenges brought about by the financial crisis. What were the most important causes of the crisis in your view?
The causes that led to the current financial crisis are highly complex. And yet, there are many similarities with previous crises. To make a long story short, the crisis resulted from a combination of over-indebtedness of private households in the US, excessive leverage of financial institutions, a general and pervasive mispricing of risk, and the tremendous growth in the creation and worldwide distribution of highly complex and often totally opaque structured products based on US mortgages. When US house prices started falling in 2007, this triggered a surge in mortgage delinquency rates. The uncertainty as to who would bear the associated losses quickly eroded confidence in the financial sector.

The unfolding financial crisis subsequently took on a pro-cyclical dynamic of its own. Deleveraging of financial institutions and the general increase in risk perception led to further declines in asset prices, which in turn led to even more losses in the financial sector, and so on.

How can similar developments be avoided in future?
It is an illusion to think that we will ever be able to avoid financial crises. But we can learn from the present crisis in order to reduce the frequency, severity, or spill-over to the real economy of future financial crises.

One of the lessons that we have learned is that we need to strengthen the regulation of the financial sector, so that our banks will be more resilient to future shocks. But we also need to be better at monitoring and addressing potential systemic risks in the financial system. This means that we need to enhance macro-prudential supervision and regulation, as opposed to micro-prudential regulation, which is concerned with the stability and resilience of individual banks. The macro-prudential approach addresses the stability and resilience of the system as a whole. Here, central banks clearly have an important role to play in the future. We have to accept that a mere focus on price stability as measured by the headline CPI is too narrow a definition of what we should be doing.

We have already come a long way in strengthening capital and liquidity requirements here in Switzerland. But more needs to be done. For example, the crisis has made it clear that certain banks around the world have developed into such large and interconnected institutions that they cannot be allowed to fail without jeopardising the stability of the entire financial system. This too-big-and-interconnected-to-fail problem is of particular concern here in Switzerland and it has to be dealt with.