4  BIS Review 116/2008  Indeed, the liquidity policy aided the transmission of monetary policy even in the turbulent times experienced over the past year, while monetary policy was left free to focus on its overriding objective of ensuring price stability. I strongly believe that especially at times of high uncertainty and rising inflationary pressures like the present, a stable and predictable central bank policy and the firm anchoring of inflationary expectations are of particular importance. There is no doubt that these are very challenging times for our economies. Some scientists argue that wildfires can be in the long run beneficial to wildlife as over time barren burned areas are covered by healthier new growth. Without pushing too far the analogy, let’s hope that the equivalent applies to the weakest segments of our financial systems. This will very much depend on the ability of all concerned parties – both public and private – to draw the right lessons and thoroughly implement them. Bearing this in mind, I look forward to the second day of this conference, during which the regulatory implications of the ongoing events shall be discussed. I wish you all a pleasant evening. BIS Review 116/2008  5
A better arbiter of market power may be measures of market contestability, in particular the potential for barriers to entry to and exit from the market. Entry and exit rates from banking have, historically, tended to be very modest by comparison with the non-financial sector and other parts of the financial sector, such as hedge funds. For banks operating in many markets and offering a range of services, aggregate returns may offer a misleading guide to the degree of market contestability. Looking separately at the different activities financial firms undertake provides a potentially clearer indication of the drivers of performance and the structural factors determining them. In this respect, JP Morgan Chase provides an interesting case study. JP Morgan Chase is a large universal bank offering a full package of banking services to customers, retail and wholesale. Its published accounts also provide a fairly detailed decomposition of the returns to these different activities. Chart 36 looks at the returns on equity at JP Morgan Chase, broken down by business line and over time. These estimates are based on the firm’s economic capital model. So provided this model adequately captures risk, these estimates ought to risk-adjust returns across the different business lines, allocating greater amounts of capital to riskier activities. (a)  “Low risk/low return” business activities  Consider first some of the activities generally perceived to be low-risk/low return – asset management and treasury and securities services and retail financial services.