These forces have kept interest rates depressed throughout the recovery and into the expansion, and include demographic change, slower potential growth, higher credit spreads, lower desired investment and a lower relative price of capital, changes in income distribution, private deleveraging and lower public investment. Given the likely persistence of these forces, our expectation is that the path for the real interest rate that balances demand and supply, will recover only gradually and to a limited extent compared to the pre-crisis era. The journey to monetary policy normalisation is still young. 24  There are potentially multiple interest rate paths consistent with inflation returning to target, as shown in Broadbent (2015b). Of these, a policymaker’s preferred path would reflect their perception of the balance of risks, preferences over policy trade-offs, view of the transmission mechanism, and “model” of the economy. BIS central bankers’ speeches  17  Annex: A simple Wage Phillips Curve A simple Wage Phillips Curve similar to Gali (2011) can be written as: =  +  +  +  +  is nominal wage inflation, is inflation expectations over where is a constant, is the unemployment rate, which, in theory, enters relative to the natural some horizon , rate of unemployment, ∗ . This is unobserved and is partly captured by the residual, (which also captures measurement error and other sources of unexplained variation in wage growth such as compositional effects). The presence of lagged wage inflation allows for some degree of wage indexation or inertia.
Finally, I should mention the agreement reached to introduce a new supervisory instrument, the leverage ratio, which is not directly linked to a bank’s level of risk; for this reason, it counters to some extent the potential shortcomings present in internal models for calculating capital needs. That leads us to one of the major issues currently under consideration: the use of internal models for evaluating the weighting of risks. There is known to be wide-ranging variability in the calculation of risk-weighted assets across different banks. The Basel Committee itself has published a report on this matter, and increasing numbers of experts and regulators deem it advisable to study the implications of the use of internal models in terms of how they affect the lack of transparency in the calculation of capital requirements and in order to ensure a level playing field for all banks. The prudential regime of systemic banks: more capital and a resolution framework A further aim of the FSB has been to eradicate, or at least alleviate, the externalities created by systemic “too-big-to-fail” institutions. Systemic banks are those which, given their interrelatedness, size and complexity, might entail, in the event of bankruptcy and disorderly liquidation, serious difficulties for the rest of the financial system. The systemic repercussions of the collapse of a bank of such characteristics, as evidenced following the Lehman Brothers bankruptcy, was the driving force behind the authorities having subsequently to bail out other institutions, with the ensuing burden on public funds.