The new frameworks should be guided by the FSB’s new international standard for resolution regimes, as endorsed by G20 Leaders at their Cannes Summit of 4 November 2011.5 This standard could mean a substantial improvement, since it not only contains a broad arsenal of effective resolution tools, but also provisions to facilitate cooperation among national authorities. Nonetheless, in my view, a greater centralization of crisis management and resolution responsibilities for cross-border SIFIs would also be needed, with a strong coordinating role for the home authority. In this regard, I would very much welcome a move towards an EU-level resolution authority, the same way as our supervisory system moved already partly from national to the EU level. 3. A bird’s eye view: the size and role of the financial sector  With this quick résumé of where we stand in overhauling financial regulation in mind, let me turn to the more general question what role the financial sector is playing in our economies at large. A major German newspaper recently published a poll that had asked respondents to name those five professions for which they have the highest respect.6 The results of the survey found the respect for “Bankers and bank employees” ranking at the bottom. Even the profession of “Politicians” was considered more – albeit marginally – respectable. Only “TV moderators” fared inferiorly to bankers. Such a derogatory view of the financial industry is not a new phenomenon, though.
BIS Review 10/2007  13  In this example, we have been able to reconstruct (approximately) the reference path in Inflation Report 3/06 by minimising a loss function under commitment in a timeless perspective. To reconstruct the reference path, the weight on the output gap in the loss function, lambda, has been set at 0.3. We also had to place a weight on changes in the interest rate in the loss function. This weight, which penalises large changes in the interest rate, can be defended based on considerations regarding robustness and financial stability. What is the outcome if we depart from our established response pattern? 14  BIS Review 10/2007  The chart illustrates what might happen if the central bank reoptimises today, but promise never to do so again. In the model, this will result in a marked rise in interest rates today. But such an approach has been criticised in the literature. If the central bank departs from its response pattern today, it is easy to believe that it will do the same in the future. It may therefore be difficult to gain credibility for such a policy. Even if it may feel tempting, it is important to be aware of the costs associated with departing from an established response pattern. It will then be more demanding to influence private-sector expectations. Frequent reoptimisations will in practice undermine the benefit of commitment and lead to a discretionary policy. The benefit of commitment hinges on the credibility of the central bank’s actions and communication.