The attraction of this is that existing shareholders will retain some of any upside, though they will pay via lower returns for the risk premium on the cost of Co-Cos. I am quite attracted to CoCos, but we need to think through whether they will create the necessary incentives to new lending. I should add that, while we are seeking to discourage banks from deleveraging in the form of lending to the real economy, we are not against releasing existing capital to support new lending where that capital is currently tied up in non-core assets, which can either be sold or run off because they are not needed on the balance sheets of banks to support the real economy, such as trading book proprietary assets. BIS central bankers’ speeches  3  Finally on this subject, let me briefly describe what we have done so far. The government and the Bank of England have introduced the Funding for Lending Scheme (FLS). FLS is in large part a response to developments in financial markets, notably the increase in the cost of bank funding which was, inevitably, being passed on in the form of higher costs of lending. In the twelve months up to the middle of this year, business lending and mortgage rates rose and the evidence we had suggested that there was an accompanying tightening in the terms and conditions of new lending.
In 1999 the GDP growth rate is expected to be rather more than 3 per cent. This implies that in 1998 and 1999 growth will be stronger than the increase in potential output, for which the annual trend is estimated to be just over 2 per cent. That means that today’s surplus capacity will be activated by degrees. It is difficult to tell how quickly this will happen. The Riksbank considers that the output gap -- a way of attempting to gauge unutilised capacity in the economy as a whole -- is currently about 2 per cent of GDP. With the growth rates envisaged above, the gap would then close some time in 1999. Other information with a bearing on when inflation might be likely to accelerate was also included in the inflation report. Estimates of structural unemployment and thereby, indirectly, of the level of unemployment that can be combined with stable, low inflation, suggest that risks of inflation also exist less than two years ahead. The rate at which capacity utilisation rises may likewise play a part. A rapid reduction of unutilised resources might generate inflationary impulses even though there is still a capacity surplus at total level. Risks in the wage negotiations Wage formation is particularly relevant at present because the settlements that are due in the coming six months will cover a large part of the labour market. Labour shortages are not yet being reported from more than a few sectors, but experience shows that the domino effects can be substantial.