Thus, I would like to use this opportunity today to highlight key areas which require attention and leadership of top policy makers at supervisory agencies as well as banks, to ensure not only soundness of individual banks, but also guard against systemic risk as a whole. Let me now turn to the first part of my talk: Key Features of New Paradigm What is driving the changing global financial landscape? The failure of several financial giants, and with many still in retrenchment, led to market space being taken up by surviving global banks, some have become state-owned via rescue programme. Their systemic importance has risen further along with their market power, and regulation must rise up to the challenge. The interdependence of the financial sustainability of these financial giants and sovereign risks have become increasingly linked, while perception of state guaranty of such institutions may distort local or even global markets, creating un-level playing-field. The demand for accountability for public bail-out money puts pressure on managing such banks, which have now become “public institutions”. Thus, the intervening authorities face a strong risk of having to micro-manage the institutions, and with this the associated risks, not least reputational and legal. Timely exit is important for the reason cited. Exit policy however could also be complicated, for example if recovery value of bailed-out fund is under pressure from weak market conditions. Most importantly, it is important to observe that, the precedence set by the actions regulators took in such intervention could have a long-term implication.
Clearly in principle the colder the external frost, the higher we need the internal temperature: the danger is that we overload the domestic boiler, with households becoming reluctant to take on more debt, or pay higher house prices, so that consumer spending growth moderates regardless of the outside temperature. Earlier this year in fact things seemed to be moving in the right direction: global demand appeared to be picking up quite well, and there appeared to be a reasonable prospect that consumption growth would moderate largely of its own accord. There was at that time a question of whether that moderation might need to be encouraged by higher interest rates. With the downward revision - over the summer - to the expected pace of global demand growth, the emphasis of our policy debate has shifted. The questions now are how far we need to try to sustain domestic demand growth by lowering interest rates, in order to maintain overall stability; and how far we can sensibly do so without excessive risk of overloading the domestic boiler. The best outcome for us of course would be if the external frost would continue to melt, with the global economy maintaining its gradual recovery and the euro continuing to strengthen in foreign exchange markets. And that is in fact in my view the most probable outcome. But until things become clearer we are very much on the spot. And perhaps, I thought, 'on the spot' was not a bad answer to the opera's third riddle.