European financial markets calmer thanks to monetary policy If you take a look at chart 1, you can follow the movements in both the euro/Swiss franc exchange rate and the average risk premium for the government bonds of five peripheral euro area countries (Italy, Spain, Greece, Portugal and Ireland). The risk premium is drawn on an inverted scale, in other words, a movement downwards signifies a higher risk. This chart serves as an illustrative example for two developments. On the one hand, it shows that uncertainty in the euro area has decreased greatly over the past twelve months. At the time of the last Money Market Event in Geneva, the risk premium was almost 1,200 basis points; it is now below 400. On the other hand, the chart illustrates the fact that the upward pressure on the Swiss franc has abated. Following a long period last year when the exchange rate stuck closely to the minimum exchange rate of CHF 1.20, it moved away in January and, since May, has fluctuated within a relatively narrow range of CHF 1.22–1.26 per euro. BIS central bankers’ speeches  1  Here, the situation has calmed in two respects. In order to reduce the risk of the euro area collapsing, the European Central Bank (ECB) resorted to an unconventional measure in late summer 2012, the outright monetary transactions programme. Market participants were persuaded, and since then the risk premium for peripheral economies in Europe has declined steadily. What is remarkable is how persistent this trend has been.
But we must be alert to the development of new forms of shadow banking, meaning substantial maturity transformation and leverage outside the banking system. The balance of activities may also shift between banks. The post-crisis reforms include additional capital buffers for globally-systemically important banks (G-SIBs), and, as the Governor has said, the FSB is on track to present a proposal for an international standard on total loss-absorbing capacity for these banks, to the Brisbane G20 summit this month. 2 These changes are intended to move G-SIBs further away from distress and to make orderly resolution possible if, nonetheless, they do fail. But it is possible that tougher regulation of G-SIBs might also encourage them to become less systemically-important over time, perhaps with some shift of activity to smaller banks. At this stage, it is too early to tell. And, in the other direction, there are some signs that higher regulatory requirements might be leading to greater concentration of activity amongst the largest firms in certain markets: for example long-term derivatives. That might be consistent with micro-economic theory, which suggests that, in oligopolistic markets with high fixed costs, an increase in marginal costs due to higher regulatory capital requirements may tend to lead to a higher concentration of activity amongst the biggest players (Chart 1). Authorities will need to monitor these trends closely. Within the scope of their business models, individual banks are also likely to change their mix of activities in response to changing regulatory requirements.