Robert Mundell, the Nobel prize-winning economist, offered a theoretical explanation for this phenomenon, suggesting that stable exchange rates, free capital movements and the pursuit of an autonomous monetary policy are, in fact, mutually incompatible objectives for economically highly interdependent countries. It was the European Union which devised and sought to implement an innovative solution to the problem of the “inconsistent trinity”.
By aggregating private-sector information about banks’ financial condition, prices and yields determined in financial markets may in turn provide important information to regulators. Difficult challenges lie ahead in implementing the new capital accord, and I do not want to enter into a full discussion of the many issues raised by Basel II today.