However, this is exactly what the proposed measures on convertible capital take into account. They create better conditions, so that capital structure will have less influence on a bank’s financing costs. Independently of this finding, it is argued that the reduction of the state subsidy – which is one aim of the new regulation – will lead to an increase in lending rates for clients. There are various arguments against this. On the one hand, structural factors within Switzerland’s banking sector limit the big banks’ scope for setting prices even today: There is a sufficient  5  Cf. Modigliani, F. and Miller, M. H., 1958. The Cost of Capital, Corporation Finance and the Theory of Investment. BIS central bankers’ speeches  3  number of domestic lending providers in the market, which keeps margins relatively low. On the other hand, the reduction in the subsidy will tend to lead to even more competition. The current disadvantage suffered by other banks active in the domestic market is lessened – the package of measures thus levels the playing field in the Swiss customer business segment. In this environment, an increase in lending rates by the big banks would lead to a loss of market share. A reduction in the subsidy is therefore more likely to manifest itself in lower returns on equity or lower compensation for the bank management than in higher lending rates. Empirically, there is no connection between the capital ratio and the credit volume, either.
4  BIS Review 59/2004  Developments in recent years With hindsight, we can certainly see that the Riksbank has not always succeeded in predicting inflation correctly and that monetary policy therefore could have been conducted somewhat differently on a number of occasions in the past ten years. This applies, for example, to 1995 and perhaps also to 1999-2000, even though the latter period’s probably too low interest rates did not have any consequences since the upswing in the economy and inflation was broken when the equity price bubble burst. This has also been the case in the past few years. Since the second half of 2003 inflation has been below target, and it is likely that it will continue to be so for at least another half year or so. This suggests that interest rates could have been lower in primarily 2002 and 2003. One conclusion from this is that we must deepen our understanding of factors such as productivity and of the impact on international prices of tough global competition. In these respects we are essentially in the same boat as other forecasters. As far as we can see, no Swedish forecasters have presented forecasts that have differed markedly from our own. In discussions with colleagues abroad, moreover, I have noted that all have been surprised by the low international inflation in the past year.