Since then, the indicators have broadly tended to entrench expectations that output will continue to increase at positive rates in the immediate future; into the medium term, however, forecasts anticipate very moderate growth rates, which will be insufficient to allow a rapid reduction in euro area unemployment levels, which remain very high. The positive effects that the turn for the better in the external environment have had on the Spanish economy have been reinforced by the headway in the economic governance of the euro, enabling the serious confidence crisis that gripped the Monetary Union in 2012 to be overcome. Admittedly, though, the degree of fragmentation persisting in euro area financial markets is still high and is not allowing monetary impulses to be transmitted efficiently to all countries in the area. Indeed, the Spanish economy as a whole – households, firms, credit institutions and general government – continues to face financing costs which, though they have moderated, remain excessive when taking into account the strongly expansionary stance of the ECB’s monetary policy. In this respect we may recall that at the start of this month the ECB decided once again to cut its official interest rates, which are now at an all-time low. In combination with the continuation of the unlimited liquidity-providing policy it has maintained since the start of the crisis, the successive cuts in official rates have led money market interest rates to extremely low levels.
As a consequence, the bank capital framework de facto becomes a partial substitute means of achieving more forwardlooking provisioning, through the internal models regime for credit risk which requires the deduction from capital of expected losses in excess of provisions. A forward-looking approach to provisioning based on expected losses would help move to a more appropriate position where the accounting standard requires a prudent valuation of banking book assets and the capital regime can focus on unexpected loss. I hope that implementation of the new accounting standard for provisioning, IFRS 9, is a step in this direction. I now want to turn to the issues around risk-weighted assets in the capital framework. Basel I was a simple framework, as I described earlier. In my view, that was its strength and weakness. The strength was that it was quite easy (certainly by today’s standards) to see the balance sheets even of the largest banks laid out and broken down by broad risk weights. The weaknesses were two-fold. First, it provided little insight into how firms measured and managed risk. As a supervisor in the late 1980s and early 1990s, I remember well meetings with firms which would start by the firm reminding that while they had filled in the risk weighted assets form faithfully, it bore no resemblance to how they assessed and managed risk in the business – what is often called “economic” as opposed to “regulatory” capital.