As intended, “limited and gradual” guidance has dampened interest rate volatility (Chart 4) and reduced the 9  correlation between interest rate volatility and economic uncertainty (Chart 5). Both developments have increased the degree of monetary policy stimulus, thereby reinforcing the recovery during turbulent times. 9  Part of the fall in volatility is likely to be due to rates being close to the lower bound, since this cuts off part of the lower tail of the distribution. 8  All speeches are available online at www.bankofengland.co.uk/speeches  8  Chart 4: Interest rate volatility has remained low since guidance was provided Standard deviation of option-implied distributions for 3m LIBOR in 12-months’ time, UK and US Basis points 200 August 2013 guidance issued  3m US LIBOR (12m ahead) standard deviation  180 160  February 2014 guidance issued  140 120 100  EU referendum  80 60 40  3m UK LIBOR (12m ahead) standard deviation  20 0  2000  2002  2004  2006  2008  2010  2012  2014  2016  2018  Sources: Bloomberg Finance L.P., Chicago Mercantile Exchange (CME), Intercontinental Exchange (ICE) and Bank calculations.
These rules establish that it will be the shareholders and investors who will bear, in the first instance, the losses of a bank. In 2016 additional rules will come into force, protecting member states and taxpayers from having to pay for systemically relevant banks by establishing a resolution fund paid for by banks. It will take eight years for the fund to reach its target level of 55 billion euro. Is this not too little, too late? It will be a quite significant amount, taking into account several other safety buffers. First, banks have considerably increased their own funds in recent years. Second, the resolution fund will only be used after contributions have been made from shareholders and creditors. These could reach up to 8% of liabilities, which is already a significant amount. Thus the overall loss-absorbing capacity of banks has increased considerably. The resolution fund comes on top of this. The third pillar of banking union, the creation of a European fund to guarantee savings deposits, has come to a standstill. Should we be worried? Not unduly, because deposits are already guaranteed up to 100,000 euro at the national level. But more importantly: if the first two pillars of the banking union work properly and secure the stability of individual banks and the banking system, the need for a joint fund significantly diminishes. The stress tests revealed worrying weaknesses in Italian banks. Is Italy the weak link in the euro area?