If the preferential regulatory treatment were done away with, this would increase banks’ incentives to take greater account of the differing risk profiles of the individual states, which in turn would strengthen the disciplinary function of capital markets. Countries that pursue unsustainable policies would then face rising risk premiums.
But my focus today will be on the intelligence we gather from financial markets. Let me start by expanding on the significance of the Bank’s market intelligence. I will then explain how we gather it and how that has evolved. Finally, I will share with you what we are learning and how we use what we learn.