The latest three-month average of M3 growth, covering the period from May to July 1999, rose to 5.4%, compared with 5.3% in the previous three-month period from April to June 1999. Overall, the annual rate of growth of M3 has been moving away from the reference value of 4.5% since the start of the year. This upward movement may be explained to a large extent by the very low opportunity costs of holding monetary assets, especially the most liquid components, but perhaps also by the gradually improving economic conditions in the euro area. At the same time, the annual growth rate of credit to the private sector remained high, even though it declined by 0.5 percentage point in July, to 10.4%. The monetary policy strategy of the Eurosystem assigns a prominent role to the behaviour of M3. Accordingly, recent monetary developments merit close attention. At the same time, taking into account the fact that we are still in a very early phase of Monetary Union and that figures for broad money growth have been subject to some revisions in recent months, shorter-term monetary developments need to be interpreted with caution. Concerning financial market indicators, the upturn in long-term interest rates in the euro area, seen since early May, continued in August and early September. Domestic factors seem to have played a dominant role, as indicated by the fact that differentials between US and euro area bond yields have narrowed further.
Indeed, it would be surprising if a new regulatory framework as complex as Solvency II had no shortcomings. In our experience there have been fewer challenges for general insurers in implementing Solvency II, largely because the net impact of the changes in the balance sheet and capital has been smaller. However, for life insurers with long-dated liabilities such as annuities – and especially in the current low interest rate environment – a significant limitation is the design of the risk margin, which is currently too sensitive to the level of risk-free rates. As the Financial Policy Committee stated in its December 2016 Financial Stability Report, addressing this excess sensitivity would have macroprudential benefits. The European Commission has committed to review the design of the risk margin in its forthcoming review of Solvency II and we regard it as a key priority. The PRA has looked at whether it would be possible to fix the problems locally through our own supervisory implementation but concluded that changes to the existing legislation would be more effective and desirable. The risk margin is calculated by multiplying a fixed cost of capital (6%) by the net present value of future capital requirements. It is intended to provide the financial resources necessary to cover the return on the capital a hypothetical acquirer would need to run off the insurance liabilities.