-7This is a reminder of the importance of the interaction between monetary policy and financial vulnerabilities. In the current context, lowering interest rates could provide some insurance against downside risks to inflation. However, this insurance would come at a cost in terms of higher household vulnerabilities down the road.
How effective is the risk-focused process? Since economic and industry conditions have been so favorable in recent years, there has not been a sufficiently stressful economic downturn to provide a robust test. The market volatility beginning in 1994 offered some insights about supervisory judgements of the risk management systems of large trading banks, but there have been few other indications.