Banks have no choice but to leverage up and take bigger risk in order to meet the targets that the shareholders demand. Modern banking at crossroads 17. So where do we go from here? As I mentioned earlier, while bank regulators clearly play an important role in influencing banking operations, it is really up to the industry to decide what it can and should do to regain the trust and respect that banks once enjoyed. We should bear in mind bank regulators are a consequence of the emergence of modern banking. However, as discussed earlier, the modality and incentive system for banking were very different in the old model of banking : there was a high degree of alignment of interest between bank owners, bank management and bank customers, which has over the years been significantly eroded. 18. Again, don’t get me wrong. I am not advocating that we should go back to oldfashioned banking. It is far too difficult, if not impossible, to turn the clock back this far and to do so might mean the loss of some beneficial innovations over the years. However, there is considerable public interest in ensuring that banking, which remains the predominant channel of intermediation between savers and borrowers in our society, functions efficiently and effectively, with a high degree of professionalism and strong ethical standards. 19. It is against this backdrop that the international community, through G20, Financial Stability Board (FSB), Basel Committee on Banking Supervision (BCBS) etc.
This caused the average interest rate level in those countries of the future euro area to be lowered considerably before the beginning of Monetary Union. The close cooperation which had always existed between the European central banks was increasingly stepped up in the final months of 1998 between those countries participating in Stage Three of Monetary Union. The coordinated reduction of central bank rates in December 1998 to 3% made it perfectly clear that, de facto, Monetary Union had already begun before the start of Stage Three. Looking at economic developments, in the first few months of this year there have been an increasing number of indications that the negative effects of the crises in Asia and Russia on growth and employment in the euro area could be more serious than was first expected. With the apparent slowdown in economic growth in the euro area, the risks that the 2% threshold for the tolerable rate of inflation would be exceeded in the foreseeable future evaporated. This forecast was also reflected in the revisions to the inflation forecasts of international organisations. At the beginning of April 1999, the Governing Council of the ECB therefore decided to reduce the interest rates on the main refinancing operations by 50 basis points to 2.5%, as well as the rates on the standing facilities to 1.5% and 3.5% respectively. The M3 monetary aggregate did expand such that it was slightly above the reference value at the beginning of 1999.