Indeed, in the face of acute uncertainty, ranking can be the optimal inference strategy.9 This explains the ubiquity of league tables across the financial sector when judging everything from investment performance to financial deal-making. But ranking has an unfortunate side-effect. By hard-wiring relative standing, it builds in arms-race behaviour among financial participants. A second structural feature of finance, which generates similar incentive effects, is maturity transformation. Banking involves borrowing short in a capital-certain instrument to lend long through a capital-uncertain instrument. When doubts creep in about this balance sheet structure, investors run on the bank knowing it is first-come, first-served. They are engaging  5  Hardin (1968). 6  Veblen (1899). 7  For example, Layard (2005). 8  For example, Dusenberry (1949). 9  Lazear and Rosen (1981). 2  BIS central bankers’ speeches  in a liquidity arms race, penalising those behind them in the queue. These actions are individually rational but collectively self-defeating if the bank goes bust.10 A third structural feature is that some markets for financial services are winner-takes-all tournaments, like elephant seals seeking mates on the beach. Whether it is making markets in financial instruments, lead underwriting a debt or equity issue or advising on a merger or takeover, there is typically only one winner. They take all. Tournaments like these lead to arms-race behaviour as firms seek to leapfrog one another in their competitive quest for top-dog status. In finance, this can lead to the winner being “cursed” and to everyone else over-competing by under-pricing risk.
In our part, we believe that a lower policy rate and a wider interest rate corridor combined with higher required reserve ratios may serve as an effective policy mix in dealing with rapidly increasing macro imbalances driven by short term capital inflows. Thank you. BIS central bankers’ speeches  3