As I have mentioned before, the medium-term stabilisation of existing government debt levels at around 60% (with inflation at 2%) was consistent with running a headline deficit of around 3% of GDP (see left-hand side figure in slide 4). In the current context, however, the observed prevalence of negative r-g differentials (see the right-hand figure in slide 4) would be consistent with government debt levels stabilising at a higher percentage of output. Given this situation, it is legitimate to ask whether a government debt level above 60% is now the correct figure? The question is not easy to answer, and it will depend on national considerations (the economic fundamentals in the medium-term, the vulnerabilities and resilience of the economy) and, of course, the prevailing financial and monetary conditions. Moreover, the current high levels of government debt evidence the difficulties of transitioning to the medium-term debt anchors. At present, converging towards a debtto-GDP ratio of 60% would require a substantial fiscal effort over a prolonged time frame. Using the historical average values of real growth, inflation and interest rates, the euro area would need to maintain a fiscal surplus of 1.1% of GDP over 20 years in order to reduce the debt ratio to 60% (see left-hand side figure in slide 5). This is substantially higher than the average primary deficit of 0.4% of GDP observed since 1995. For this constant fiscal effort to be at more plausible values, the macroeconomic environment would need to be far more favourable than it has been in recent decades.
Finally, we want markets to provide economic incentives for institutions to improve bank management and disclose information that is relevant to end-users’ needs. What I am saying is that the “efficient frontier” can best be achieved through a combination of the three pillars, given the reinforcing/diversification effects of each. Each pillar provides something that the other cannot and is essential to achieving our overall objective of financial stability. I realise that this presentation of the three pillars as items of a portfolio of policy options is an oversimplification, but I think it helps us visualise why we think that the most “efficient frontier” involves a mixture of minimum rules, tempered by supervisory discretion, and supplemented by market-based incentives. Current industry practices and issues that arose in consultations Let me now move to current industry practices and how transparency is incorporated into the Basel framework. In deciding to revise the 1988 Accord, the Basel Committee thought carefully about what improvements to banks’ public reporting would mirror the New Accord’s incentives-based approach to foster improvements in risk management. In recent years, the Committee has noted some improvements in the quality of bank reporting worldwide. Annual surveys conducted by the Committee suggest that the extent of banks’ public disclosures has increased markedly in some areas. Still, important deficiencies remain.