In Europe, the ECB’s deposit facility rate was already set at -0.5% before the COVID-19 crisis.6 In our statements, we have stressed that this rate could be further lowered in the future. Yet in any event, looking back it seems clear that conventional monetary policy — i.e. that based on controlling the short-term interest rate — has less scope for action than, for example, a few decades ago. The lower bound on interest rates generates asymmetry in monetary policy conduct. As I commented earlier, if inflation rises above its target, central banks may increase interest rates as much as necessary in order to “cool” the economy. However, in the face of deflationary shocks driving inflation below its target and leading the central bank to cut its interest rates, these may ultimately “collide” with their lower bound. This asymmetry makes monetary policy potentially very effective for combating inflation, but less so for combating deflation or even persistently low inflation. The latter may lead to a dangerous vicious circle. Against a backdrop where central banks’ hands are expected to be frequently tied by the lower bound on interest rates, economic agents will expect any inflation overshooting to be corrected swiftly. However, this is not the case for undershooting. Therefore, average expected inflation over a long period will tend to run below target.
A second course of action is the possibility of imposing restrictions on the saving of own funds prompted by the use of the advanced as opposed to the standardised approach which, at an extreme, could lead to the results of the standardised approach being used as a floor for the required capital. A third proposal is the use of a leverage ratio as a complement to the traditional solvency ratios. As you know, the Basel Committee published, scarcely two weeks ago, a document detailing the work performed to introduce, in the near future, a minimum leverage ratio in the regulatory framework of banking activity. As a concept, the leverage ratio can be defined very simply as the ratio of the bank’s highquality capital to its total exposure. However, transposing the concept to regulation requires, in practice, adopting complex decisions on how to measure certain exposures (such as repos and derivatives) and the extent to which these exposures should be netted or not for the purposes of calculating the ratio denominator. And all this must be done bearing in mind the existence of various approaches in the different jurisdictions linked largely to the heterogeneity of the accounting frameworks in place. The definition proposed by the Basel Committee is a pragmatic approach to the problem that should provide for the application of a similar methodology for the calculation of the leverage ratio worldwide.