We can formalise and specify this reasoning somewhat by saying that it is a case of selecting a policy rate path that minimises a forecast loss function, written as the following common quadratic form:  BIS Review 29/2009  3  2  Evaluation ex ante – given the information available at the time of the decision So, given that a central bank conducts flexible inflation targeting, how should we evaluate the monetary policy the bank conducts? When evaluating monetary policy, as when evaluating decisions in general, we may adopt one of two different starting points. The first option is to base our evaluation on the information that is currently at hand; that is also including the information that has become available since the decision was made. This is, in other words, an evaluation after the fact. We can call this an ex post evaluation. The second option is to put ourselves in the position of the decision makers at the time the decision was made and to try to evaluate the decision given the information that was then available. We can call this an ex ante evaluation. When evaluating monetary policy, the most interesting question is not whether the decision could have been better after the fact. As I said earlier, monetary policy is conducted under conditions of great uncertainty – there is a time lag before monetary policy has an impact on inflation and the real economy and the economy is constantly subject to new shocks.
Among the major non-bank financial institutions, the most important part of the financial system today where we need a stronger capital regime relates to the GSEs. Even with the improvements in risk management at these institutions over the last few years, we are some distance from the point where their regulatory capital requirements appropriately reflect their risk. While critically important, capital alone does not define an institution’s strength. It is vitally important for firms to continue to invest in strong internal controls and to make sure that advances in the operational infrastructure keep pace with rapid growth, particularly in complex transactions. Strong operational controls can help ensure smooth market functioning in times of stress, and when they are weak they can exacerbate adverse market dynamics. An important element of a sound operational control environment is timely and accurate information for senior managers, especially when it is most critical for them to have a clear picture of the firm’s exposure. As such, strong operational controls can help reduce some dimensions of uncertainty and therefore help markets function better in conditions of stress. The challenge of ensuring that operational controls keep up with front office advances in the complexity and volume of transactions is particularly evident today in the area of credit derivatives.