As well as making it easier to resolve the crisis itself, clarity in this respect also affects how banks and other financial institutions develop their operations and also how supervision of them can best be shaped. Instead of thinking in terms of the sequence integration – supervision – crisis management, one should see it in the other direction, that is, crisis management – supervision – integration (Figure 1). My second thesis is that it is unfortunately very rare that this is done in practice. 7  For an example of a theoretical analysis of how consideration for financial stability can be built into a model for inflation targeting, see Woodford, M., “Inflation Targeting and Financial Stability”, forthcoming in Sveriges Riksbank Economic Review. BIS central bankers’ speeches  5  Figure 1 Bank regulation should be based on reverse induction  Timing of events  Logic of incentive analysis  Integration  Supervision  Crisis management  Crisis management  Supervision  Integration  Inadequate planning for crisis management in the monetary union This reasoning can also be applied to nations, not just to their financial systems. During the autumn, we have seen yields on government bonds soar in a number of euro area countries, particularly those with sovereign debt problems. It is quite clear that the euro area lacks the necessary institutions to manage such a crisis situation. In the United Kingdom, on the other hand, yields have not risen in the same way, despite weak public finances there too (Figure 2).
2  See, for instance, Eggertsson, G. and P. Krugman, “Debt, Deleveraging, and the Liquidity Trap”, Federal Reserve Bank of New York Working Paper, February 2011 and Mian, A., K. Rao and A. Sufi, “Household Balance Sheets, Consumption, and the Economic Slump”, Chicago Booth Working paper, November 2011. 3  See, for instance, Eichengreen, B., R. Rajan and E. Prasad, “Central banks need a bigger and bolder mandate”, Financial Times, 24 October 2011. 2  BIS central bankers’ speeches  there is then a risk that both will become unclear. The outcome may also be poorer and it may be more difficult to hold policymakers accountable.4 The problems are exaggerated by those who believe that both types of policy must be coordinated… I can understand both points of view, but I believe that both have exaggerated their arguments somewhat. Those who say that monetary policy and financial stability policy should be integrated to a greater extent sometimes give the impression that they believe the central bank should at every monetary policy meeting both determine the policy rate and activate a number of macroprudential supervisory levers to find a policy mix that is appropriate for both monetary policy and financial stability. I do not believe that this is the way things will be done – I believe that this way of thinking is too coloured by recent events. After all, it is not as though problems arise from overgenerous credit granting during every economic cycle. Most cycles are ”normal”, with no financial imbalances or balance-sheet problems.