On top of maintaining their central role in the payments system, this means that, even if operating an ‘originate and distribute’ model in their investment banking business, commercial banks still have substantial funds to employ in asset portfolios. This can be achieved in a number of ways: for example, holding onto originated assets, buying assets after they have been securitised by other banks, or entering the principal investment business. All three are underway to a greater or lesser degree. In the UK, until quite recently large banks probably held on to more loans than their peer group22. In the US and parts of Continental Europe, the commercial banking sector acquired massive portfolios of securitised assets in the first half of the decade, possibly diversifying sectoral or geographical exposures. And a range of banks have been entering or reentering the principal investment business. What to make of all this? Well it certainly underlines the difficulty of using the growth or composition of bank balance sheets as the sole basis for judging credit conditions. With so much credit distributed and traded via capital markets, quantity data have to be put alongside prices (yield spreads) and, ideally, qualitative information. It is in that context that the Bank is planning to introduce a formal survey of credit conditions next year. This important initiative is designed to help us get behind the money and credit data.
I should make clear that, as put, I would not go along with this completely. It would all depend on whether medium-term inflation expectations were well anchored. So long as they were, the central bank would have a wider choice than a one-item menu of having, putting it crudely, to generate a material downturn in the short term to contain inflation; or, symmetrically, a boomlet to raise inflation. Another possible choice might be to tighten (loosen) modestly but for longer, allowing inflation to return to target over a longer  2  BIS Review 2/2007  horizon; and if the policy maker explained the considerations behind the likely path of policy, price and wage setters might act in a way that helped to bring inflation back to target5. Acting aggressively without need could endanger the political economy foundations of any central bank’s authority. It has to be a judgment based on the particular circumstances. In terms of my central theme this evening, this is a world in which monetary regimes truly are better, but in which policy makers are having to face some fresh challenges. Asset pricing uncertainties If central bankers see possible interruptions to the Great Stability, there is arguably conflicting evidence as to whether financial markets are giving it insufficient weight or – at the opposite pole – taking stability for granted.