In the medium term, the monetary policy reaction to downturns on the asset markets influences market participants’ risk perception in the following upturn. This is especially evident where monetary policy makers apply a risk management approach that asymmetrically lowers rates in times of severe financial market downturns, over and above what would be deemed necessary given the baseline outlook on prices and growth.
While regulation can provide an enabling environment, it is for the market participants to exploit the opportunities provided, but they have to play the game as per the rules. Bank capital regulations – the efficiency-redundancy paradigm 8. Let me now turn to some specifics.