So, imposing new trade barriers – or “bilateral deals” – on some trade partners not only has almost no chance of eliminating the overall current account deficit, but it also threatens long-run economic growth. Alternatively, it would also be misleading for countries to carry out non-cooperative domestic macroeconomic policies. Competitive devaluations first: after some unilateral and unfortunate declarations last week, several of us on the Governing Council of the ECB felt the need to reiterate that during the last IMF Annual Meetings in DC last October we committed with all our partners to a multilateral approach saying that, I quote, “we will not target our exchange rates for competitive purposes”. Any deviation from this common rule would be at the cost of breaking mutual trust and global growth. Speaking of the Governing Council of the ECB, let me say a few words on our monetary policy. It is following, with confidence and with patience, a path of gradual normalisation. But one shouldn’t focus excessively on the sole instrument of monthly net asset purchases: whether we end them in September or taper them somewhat more gradually is not a “deep existential” question… There are two more important issues: First, we prefer, as in Irish dancing, a four-hand reel rather than a solo; we will rely more and more on the entire policy package, including the sizeable stock of acquired assets, the forthcoming reinvestments and the forward guidance on interest rates. And we will follow a predictable sequence.
I should emphasize that the weaknesses of the current regulatory capital framework are much more relevant to the supervision of the largest and most sophisticated banks than they are generally across the industry. For the vast majority of the thousands of U.S. banks, the existing regime largely works. In recognition of this, among other considerations, we expect that in the U.S. most banks will stay on Basel I while the largest and internationally active banks will adopt the advanced Basel II approaches. We are considering some simple adjustments to Basel I to ensure that the framework is up to date and that there is competitive equity with Basel II adopters. In any event, the lack of risk sensitivity and incentives for arbitrage have made Basel I less relevant in our supervision of the largest banks - it is a benchmark requirement to be met, but not, in practice, a critical discriminating factor as we judge their financial condition. As supervisors, we have focused increasingly on assessing the rigor and effectiveness of each organization’s risk management and control systems. We have looked to understand the risk appetite of each firm, and then assess how well it is able to measure and manage the resulting degree of risk taking. A key recent part of the supervisory effort has been to encourage the development of banks’ internal economic capital models - models that link risk taking to capital and that look to compare risk taking, and the returns on risk, across business lines, regions and products.