This is reflected in the fact that the Danish Central Bank invariably alters its interest rates in the wake of announcements of changes in the European Central Bank (ECB) policy rate. Sweden and the UK have opted for inflation targeting as their monetary policy framework, which therefore does not have the objective of keeping these countries’ currencies stable against the Euro. European Central Bank The Maastricht Treaty stipulates monetary arrangements in the EMU. The EU countries created a framework for the ECB’s activities which was to some extent modelled on the Central Bank of Germany but differed in many ways from the arrangements in others. Various conditions were set which EU members had to fulfil in order to be granted EMU membership. On the one hand these related to major components of economic developments, such as inflation, fiscal deficit, government debt and interest rates. On the other hand they addressed the framework that the Maastricht Treaty lays down for monetary policy implementation in the EMU. This policy was consistent with growing support for the view that it was natural to set a simple target for central banks – i.e. promoting price stability – and to increase their independence from the political leadership in pursuing their main objectives, and to strengthen their financial independence. Another emphasis was that, at the same time as the central banks’ independence was strengthened, stricter demands would need to be made of them regarding transparency in their activities and actions, and regarding accountability towards the government and general public.
Get creative It’s easy to say, in essence, “Don’t miss the forest for the trees.” Let’s acknowledge that the challenges you encounter in the first line of defense are a veritable thicket. To manage effectively the risks that your firms face requires intellectual agility and creativity. For now, I want to touch on a few considerations: diversity, choice architecture (especially incentives), and moral reasoning. These inputs can help you apply the three lines of defense model more effectively, especially in the face of rapid technological innovation. Diversity If you want to think nimbly, embrace diversity: the way we think, our backgrounds and areas of expertise, our experiences—including, but certainly not limited to, the ways that people treat us because of where we were born, our race, gender, pedigree, sexual orientation—and even our values. Diversity can help address the problem of silos that I described earlier. The problem with silos is not specialization, but blind spots. At the New York Fed, I don’t want economists making legal judgments, or lawyers performing economic analyses. But I very much want lawyers and economists to provide insights to each other based on their specialties. More generally, inviting outside views helps avoid common, human biases. 4 “Groupthink” is one well-documented bias. Another is the “endowment effect”—placing greater value on what one already has versus what one does not. What links these phenomena is an excessive preference for the status quo.