In a seminal paper (Fischer, 2001) this “move towards corner solutions” was viewed as a response to the impossible trinity under free capital movements. At that time Romania still had capital controls in place. But when we completed the capital account liberalization, in September 2006, the issue had become not only academic, but also a practical one. By then Romania had adopted inflation targeting and the problem seemed to have been solved: such a regime seemed incompatible with any type of managed float of the exchange rate. In reality, things proved to be much more complicated. Despite NBR interventions, the exchange rate of the leu witnessed a significant nominal appreciation immediately before and after EU accession (January 2007). In retrospect, I would say that it was more difficult to conduct monetary policy when confronted with massive capital inflows than with the scarcity thereof. When flooded by capital inflows (especially when concentrated in non-tradable sectors), a conflict between price stability and external equilibrium emerges. Interest rate hikes may be needed in order to manage aggregate demand and anchor expectations, but this would entail further capital inflows and an unsustainable nominal appreciation of the exchange rate. BIS central bankers’ speeches  3  This was the dilemma the NBR faced between 2006 and 2008, when the current account deficit exceeded 10 percent of GDP, a level which was clearly unsustainable, despite being largely financed through foreign direct investments. Amid the ongoing international financial crisis, a significant adjustment of the current account deficit became unavoidable.
Situation in the banking sector As our Financial Stability Report published today describes in detail, the situation in the Swiss banking sector deteriorated considerably in 2008. The turbulence in the money and credit markets that had erupted in mid-2007 worsened in 2008, also spilling over to other areas. The two big banks, in particular UBS, were hit hard by these negative developments. As you know, together the two institutions recorded a total loss of some CHF 30 billion in 2008. 1 They took extensive measures to strengthen their resilience. In addition to reducing risky positions, they raised sizeable amounts of private capital. The resilience of UBS was further strengthened by the package of government measures announced by the Federal Council, the SNB and the then Swiss Federal Banking Commission (SFBC, now FINMA or Swiss Financial Market Advisory Authority) in October 2008. Owing to all of these measures, the big banks’ capital situation at the end of 2008 improved slightly compared to the end of 2007, despite the massive losses incurred. However, our assessment is that, overall, risks in the big banks’ books are still material. This is all the more serious since, compared to the end of 2007, the profit potential of the big banks is lower. Banks with a domestic business focus, i.e. cantonal, regional and Raiffeisen banks, present a much more favourable picture. Although the overall profitability of these bank categories declined in 2008, it still remains above the long-term average.