It is now clear that the financial sector had not been fully able to manage the risks and that supervision of the financial sector needed to be improved. A more moot point is whether central bank monetary policy contributed to the build-up of financial imbalances.2 Had central banks been so focused on stabilising inflation that they ignored the financial imbalances that were building up? Had the Great Moderation given rise to overconfidence in the ability of monetary policy to steer the economy? I believe that both these questions will become increasingly important in the period ahead. I also believe that they need require further analysis, although one lesson to be learned in any event is that financial stability cannot be taken for granted. We can also establish that the recovery after the crisis has been slower than many expected. Output per capita in Sweden and in several other countries is only between 1 and 5 per cent higher than before the break-out of the financial crisis (see Figure 1(a)). Another example is labour productivity. In Sweden, for example, labour productivity is around 5 per cent higher than in 2007, which is a slow rate of increase in a historical perspective (see Figure 1(b)). Once a financial crisis has broken out, it can hence take a very long time for the economy to recover. 2 See also Billi and Vredin (2014) and Rajan (2005). 4 [23]  Figure 1.
At first sight it might appear that banks and other financial institutions, as service companies, have less responsibility for environmental protection than other companies, notably those whose industrial processes have a direct impact on the environment. However, this would be to ignore the central role in the economy that banks have as financial intermediaries. While they may not be polluters themselves, they will probably have a banking relationship with some companies that are polluters or could be in the future. This creates a number of risks for the banks, and raises the question of how these risks should be identified, measured, monitored and controlled. This is primarily a matter for banks’ management to deal with, and I hope that today’s conference will help them to do so. But it is also an issue for banking regulators, particularly with the increased focus on risk-based supervision. In the case of the HKMA, this is a process whereby we try to assess the extent to which banks are exposed to various types of risk and the quality of the systems used for managing these risks. For this purpose, we have identified eight different types of risk: credit, market, interest rate, liquidity, operational, legal, reputation and strategic. Environmental risk straddles a number of these risks. In particular, it is a subset of credit, legal and reputation risk: •  Credit risk can arise indirectly where banks are lending to customers whose businesses are adversely affected by the costs of cleaning up pollution or by changes in environmental regulations.