However, as I mentioned earlier, we see increasing volumes of less liquid and more complex assets for which firms have themselves to assign a CQS. Given firms’ judgements play an important role in determining the CQS we need to be confident that their internal rating processes are robust. We have set expectations for firms in Supervisory Statement 3/17: “Solvency II: Illiquid assets”8, that where ratings are a significant driver of technical provisions and capital requirements, we expect those ratings assigned by firms to be broadly consistent with public ratings that could be obtained from ECAIs. Consistency with ECAI public rating methodologies, including any allowance for rating caps, are key points to distinguish from opinions ECAI only provide privately, based on other assumptions. Rating consistency remains a key area of PRA engagement with firms, and to demonstrate consistency firms need to show that they understand what ECAIs do, and then to internalise this in their own processes. Secondly, the fundamental spread sector. As well as credit rating, the sector that an asset comes from is a key driver of the FS. Chart 9 compares at year-end 2020 the FS for A-rated assets depending on whether the financial or non-financial FS is used.
For this reason, it would make sense in my view for us to remain fully committed to developing and implementing effective macro-prudential policies, but at the same time not to blindly pin all our hopes on them. Ultimately the best defence against any conflicts between financial instability and unconventional monetary policy is for that policy to last for no longer than is strictly necessary. This means that we need to maintain the pace and volume of our interventions, as we have communicated, so that inflation rises back towards 2% as quickly as possible and that monetary policy can begin once more to normalise. But it also means something more: if interest rates are low because the natural rate is low, then for interest rates to rise back to more normal levels the natural rate will have to rise as well. And insofar as a low natural rate reflects weak investment demand caused by diminishing labour supply and low productivity growth, this may only be possible in a context of structural reforms aimed at boosting supply capacity. This brings me to the second risk of unconventional monetary policy: that it could in principle delays the very reforms that are necessary for monetary policy normalisation. Let me say upfront that the evidence we can see in the euro area at the moment suggests that this is not necessarily the case. Some countries have recently taken steps in the right direction – but more can and needs to be done.