Despite the speed with which Bank Rate was cut to 0.5% in late 2008 and early 2009, and the rapid move to quantitative easing, the economy is still looking fragile. During the pre-crisis period, MPC members recognised in a number of speeches the possibility that the upward trends in property prices and in the growth of credit were increasing the risk of a period of economic instability. For example, as long ago as 2003, Charlie Bean suggested: “Action taken today to reduce the build-up of imbalances might pay off in the longer term by reducing the future uncertainty that the policymaker will face as imbalances unwind.” 2 At around the same time I commented, with reference to the rising household debt/income ratio, that this “...may have increased the risk from policy error, or from an adverse shock to the household sector.” 3 And Andrew Large argued: “the key issue  1  World trade monitor, source: Netherlands Bureau for Economic Policy Analysis. 2  Bean (2003). 3  Barker (2003). BIS Review 27/2010  1  for monetary policy is that the more capital gearing or leverage increases, the greater the vulnerability to shocks and the consequent adjustment to consumption behaviour.” 4 One conclusion might be that the depth of the present crisis might have been mitigated if the MPC had taken the view that, in those circumstances, it was preferable to miss the inflation target on the downside in the short-term.
This reflects the systemic impact CCPs can have in situations of extreme stress, by disrupting repo markets or channelling liquidity strains to banks – which are also monetary policy counterparties – thus affecting the circulation of liquidity in payment systems. Ultimately, CCPs may need to rely on central banks as lenders of last resort. Central banks therefore have an important role to play in the regulation of central clearing – a notion which is largely recognised but often misunderstood. In this context, let me say a few words about recent developments in the area of CCP regulation, and in particular the outcome of the legislative process regarding the revision of the supervisory framework for CCPs, the European Market Infrastructure Regulation (EMIR II), and the recommendation to amend Article 22 of the Statute of the ESCB and the ECB. The ECB recommended to EU legislators that its Statute be amended to clarify that the ECB had legal competence over CCPs, which would have allowed it to perform its statutory monetary policy role under EMIR II. We made the case that the ECB needed explicit general competence to monitor and address risks relating to our mandate, including broad discretion to take necessary measures in exceptional situations where the stability of the euro is at stake.