This conference is focused on one important element of this: the role of financial markets in the setting and transmission of monetary policy. That is covered in the Bank’s publications on how the economy works, including the Committee’s 1999 paper on the Monetary Transmission Mechanism (MTM), and books describing the models used in forecasting. 1 But those high-level descriptions miss out an awful lot about how the real and financial parts of the economy connect. Financial variables are limited to the short-term interest rate, the exchange rate, and equities. Nothing on the role of long-maturity interest rates, or on credit spreads and risk premia – which misses out a whole universe of financial asset prices. Very little on credit more generally. Next to nothing on money. And nothing at all on the role of bank intermediation. These gaps were perhaps underlined by a degree of confusion amongst commentators about the way in which Money and Credit featured somewhat more prominently in the Committee’s discussions during the backend of 2006 and into this year (Chart 1). With both having been strong for a while, some asked whether this marked some kind of change in the reaction function, implying a greater stress on nominal variables. Given the near identity of deposits and bank lending, Money and Credit are often used almost inseparably, even interchangeably, with wider measures of non-bank credit looked at only when assessing the health of corporate and household sector balance sheets.
This common view will be established in a set of rules and standards which will be laid down and developed by the EBA and the ECB itself. With the Single Rulebook as a basis, other instruments will also ensure that the same approach is used in the supervision of all banks. This will include the Supervisory Manual and ECB regulations, guidelines and general instructions. BIS central bankers’ speeches  1  Resolution of credit institutions Single resolution, the second pillar of the banking union, is a necessary complement of single supervision. It is essential that if a bank enters into difficulties, it may be efficiently resolved with no or minimal costs for European taxpayers and with little impact on the European financial system and on the real economy. The draft Regulation on Single Resolution, submitted by the European Commission to the Council and the Parliament last July, builds on the concept, envisaged by the European Council more than a year ago, that is, a resolution system comprising a single resolution authority and a single resolution fund. In such a system, resolution will be based, first and foremost, on common EU “bail in” rules, whereby banks’ shareholders and creditors should first bear the cost of a bank resolution. Only if this were not enough, would the single resolution fund – meaning, the Industry – step in, making the fiscal backstop the very last resort.