For example, Barbara Rossi and co-authors find that while risk fell sharply after the great financial crisis, Knightian uncertainty – situations in which people might be unable to assign correct probabilities to future outcomes – remained persistently high even after the end of the crisis.11 In these cases, investors still have to make a decision, and judgement – often based on current observables – is usually the only basis they have. Whatever the ultimate reasons, does it matter if the inflation risk premium is low? There are two sides to the discussion. From a monetary policy perspective, what matters most is that inflation expectations remain at levels consistent with price stability. At the margin, a low inflation risk premium is positive as it signals increased confidence in the central bank’s ability to achieve its inflation aim. But from a financial stability perspective, and here I again refer to previous work presented in the ECB’s Financial Stability Review, a low inflation risk premium may be a matter of concern if it indicates complacency about future adjustments.12 In this case, a reappraisal of investors’ view about future risks to global inflation may cause a correction of global risk premia, in particular in an environment of historically low volatility, as you can see on my next slide. Oil prices may be a potential catalyst. ECB internal research finds that energy price shocks have become considerably more persistent lately, which could fool investors into believing that they are bound to stay at current moderate levels in the foreseeable future.
In Scandinavia and the Benelux countries, the pressing need for economies of scale has forced major banks to look beyond their domestic markets for partnerships, and cross-border mergers have been common. In Singapore, the same thing is already happening in the telecommunications industry. The Government has decided to allow, and indeed to encourage, dominant local players like Singapore Telecom to go beyond foreign acquisitions, to seek foreign mergers. As Singapore banks increasingly confront the same imperative, we will have to consider exactly how far we are willing to trade off retaining a few Singaporean-controlled banks against the logic of globalisation. Conclusion The Asian crisis has led to a rethink of the consensus in favour of globalisation and free capital flows. The result has been to reaffirm the logic of globalisation, and the value of free markets and free trade. But it has also caused a more sober appreciation of the risks of international flows of capital, and clarified the necessary preconditions for countries to minimise the difficulties and reap the benefits from freer capital flows. Singapore’s experience in bringing our financial sector up to best practices during and after the crisis shows how complex and delicate a task it is, despite Singapore’s relatively strong starting point. It will be even more challenging for countries in less favourable circumstances, to find their way forward in post crisis Asia. In this quest, these countries deserve the full support of the international community. 9  BIS Review 76/2000