Traditional channels, – through interest rates- have become ineffective: first of all because economies have hit the zero lower bound; and in some case, like in the euro area, because transmission – through credit – has been clogged. The expansion of balance sheets results from attempts to overcome those limits and allow monetary policies to fulfill their mandates via large scale of assets purchases. 2. Is it the size of the balance sheet or the means of its increase that matter? The causes and consequences of changes in balance sheets size are rather diverse. Broadly speaking, both liabilities and assets of Central Banks matter. An expansion of liabilities occurs when, as the Eurosystem did in many instances, the Central Bank increases liquidity provision to the banking sector, with the explicit objective of easing pressures on funding, reducing its costs, and ultimately, influence lending behavior. Expansion of liabilities may be  BIS central bankers’ speeches  1  more passive though when setting an exchange rate floor such as in the case of the SNB. Looking, now, at the asset side, asset purchases bring down risk premia, they trigger portfolio rebalancing, flatten the yield curve, increase risk taking in the private sector and shift expectations in a more positive territory. As you all know, the Eurosytem has now embarked into a major purchase program, the PSPP, that follows other programs of smaller sizes for asset-backed securities (ABSPP) and covered bonds (CBPP3). There are many technical discussions.
Consequently, we do not think that aligning the regulatory framework to banks’ contemporary risk measurement techniques will make lending patterns more volatile. Nor do we think that it will harm competition or dry up capital flows into emerging market countries. The Committee has worked to ensure that the new framework contains sufficient options and simpler forms of rules so that its basic principles can be applied to many kinds of banking organisations in many countries. Basel II presents an excellent opportunity for emerging and developing markets. By stimulating banks to upgrade and improve their systems, business models, capital strategies, risk management systems and disclosure standards, Basel II should improve their overall efficiency and ability to compete globally. It will help to reduce the risk premiums of emerging and developing markets and will help to ensure the stability of the financial system. Still, it is clear that, to accomplish all of these intentions, the new capital framework will be a very different approach to supervision than what we have known so far. It will require hard work on all of our parts. Bankers must work to ensure that their risk management systems meet the standards to qualify to use the more sophisticated measures of risk. For our part, supervisors must ensure that we are comfortable with banks’ progress. But we must also be ready to supervise a more comprehensive capital framework. We will need to share information on the issues we encounter in moving from the 1988 Accord to the three pillars of the new framework.