Gerry Corrigan noted three decades ago that the “implicit codes of conduct” that govern banker behavior exist apart from “explicit regulations.” He posited that these implicit codes must align with the public good – an obligation that banks owe in exchange for the benefits “uniquely available to [that]particular class of institutions.” 4 This, in Corrigan’s view, was what made banks “special” – the reciprocal benefits and responsibilities that support and constrain an industry essential to public well-being. Corrigan’s premise is not an antique concept from a bygone era of banking. Then, as now, there are public purposes of banking – including financial intermediation, corporate valuation, facilitating investment opportunities, providing credit and creating market liquidity. These activities underpin the economy and financial stability. Reciprocity – in other words, the expectation of a quid pro quo in the relationship between society and the financial services industry – is the basis of public trust in financial institutions. There is, however, a widespread sense that this principle has been compromised. 1  What I have to say today represents my own views and not necessarily those of the Federal Open Market Committee or the Federal Reserve System. Stephanie Chaly, James Hennessy, Thomas Noone and Joseph Tracy assisted in preparing these remarks. 2  See Malcolm Gladwell, The Tipping Point (2002), 133–168 (collecting sources). For additional information on the famous Stanford Prison Experiment, see www.prisonexp.org. 3  Adam Smith, The Theory of Moral Sentiments (11th ed. 1812), 276.
Such very powerful and perverse feedback loops have been at work during critical phases of the crisis, over the last two years. The purpose of the banking union, decided on in June, is to break that link and create, as a first stage, a single supervisory mechanism in the euro area under the auspices of the ECB. It is essential that the banking union be rapidly implemented, covering all credit institutions. It will restore confidence in the banking system. It will re-establish the normal functioning of monetary policy. It will de-segment financial markets and allow for normal private capital flows within the euro area. It will ultimately allow for a disengagement of the euro system from interbank and financial intermediation. Moving decisively towards a Banking Union is one major contributing factor in reducing uncertainty and boosting confidence. Conclusion: the ability of monetary policy to fight uncertainty Uncertainty is a major cause of the current weak recovery. One may point to the paradox in the present environment characterised by very low interest rates, very large cash reserves in the hands of corporates, but very little investment. The good news is that a small spark could have huge effects. The bad news is that this spark has not occurred. Monetary policy cannot by itself remove economic uncertainty. It can contribute to limiting and attenuating its effects. It is also essential that other sources of uncertainty be dealt with, especially when they stem from government policies.