The July Monetary Policy Report included such an outline that shows how one can approach this question.11 The reasoning concludes that one can regard recent monetary policy as a trade-off between target attainment in the coming years, that is the period for which the Riksbank normally makes forecasts, and target attainment in the long run, beyond the forecast horizon.12 The idea is that a monetary policy that solely focuses on target attainment a couple of years ahead could miss the fact that financial imbalances are building up that risk leading to very poor macroeconomic outcomes in the longer run. According to this outline, decision-makers need to balance target attainment in the short and medium term against target attainment in the long term. Thus, there are two questions one needs to take a stance on: How does indebtedness affect the risk that shocks will lead to a really severe depression? And to what extent can monetary policy affect indebtedness and thus the risk of this type of scenario? The latter question, in particular, is important in this type of trade-off. Unclear benefits but clear costs Monetary policy is the most effective tool we have for influencing general price developments. It has an impact through, for instance, credit growth in the economy. Monetary policy can therefore be used to dampen credit growth when it appears alarmingly high, even if this does not appear justified on the basis of the prospects for inflation.
This morning, I would like to take the opportunity to briefly address some of the issues and priorities that are currently directing the Bank’s work in this area. We have substantially completed a review of the existing corporate governance frameworks for the banking and insurance industries and expect to be able to consult with industry on our specific proposals to update and harmonise the frameworks later this year. As part of this review, the insurance industry can expect that what is currently described as “best practice” in the prudential framework on corporate governance will be elevated to principles or minimum expectations to be met by all institutions. We do not expect this to substantially alter current practice in the industry given that for some time now, the Bank already holds insurers to higher standards that reflect the maturity of the industry and the more sophisticated nature of the business over time. But we also set out in the review to take a fresh and critical look at some key elements of the governance framework to ensure that our requirements remain fit for purpose in the context of the changing financial landscape. Independence, board size and composition, and expectations of subsidiary boards are among some themes addressed in our proposals. We have drawn extensively on our supervisory observations and thematic reviews of governance practices over the course of the past two years in informing our review. In many areas, positive changes can be observed in the governance practices of insurers.