Excess domestic demand combined with low productivity growth should be reflected in rising prices, and domestic measures of price and wage inflation in the catchingup economies were indeed running considerably higher than the euro area average on a cumulative basis. Average annual inflation differentials in the 2002 to 2008 period were in the range of 0.5 to 1.5 percentage points. However, these developments were not considered especially alarming by some observers as they were interpreted as reinforcing the theory of Balassa-Samuelson equalisation. Some also saw inflation differentials as being more reflective of low inflation in Germany as it went through a phase of wage adjustment. Overall, this may have led to less concern about the lack of real convergence in productivity levels than was warranted. 8  European Commission, “EMU@10: Successes and challenges after ten years of Economic and Monetary Union”, European Economy 2, 2008. 9  See for example Minsky, H (1982), “Can ‘it’ happen again?”, Essays on Instability and Finance. 10  Drehmann et al (2012), “Characterising the financial cycle: don’t lose sight of the medium term!”, BIS Working Papers No 380, June 2012. 11  For a detailed explanation see Borio et al (2013), “Rethinking potential output: Embedding information about the financial cycle”, BIS Working Papers No 404, February 2013. 4  BIS central bankers’ speeches  Achieving sustainable convergence It was only when the financial cycle turned that the unsustainability of economic convergence became apparent.
Some banks have even moved their core banking systems into the cloud to reap the benefits of its scalability and resilience. Cloud computing has considerably enhanced risk management. Risk assessments are now more comprehensive, more granular, and more real-time. But the cloud has also introduced new risks. The risks are not so much in the technology of cloud computing per se but in the business and operating models of cloud services. Cloud services are essentially a utility provided by specialist third-party providers. And as with any third-party service provider, there are outsourcing risks associated with these cloud service providers or CSPs. But with cloud computing, these outsourcing risks are much larger, given how much of a financial institution’s data and processing functions rely on CSPs. Financial institutions have less knowledge, let alone control, of where their data are stored in a cloud computing infrastructure spanning several different jurisdictions. Data breach or loss might occur due to a natural disaster, targeted attack, or poor security processes at the CSPs. The outsourcing risk is compounded by concentration risk. The top 4 CSPs in the world had a market share of 80% last year. About 25% of the core banking systems of global systemically important banks or G-SIBs is 5/9  BIS central bankers' speeches  now residing on the cloud. A large supplier of cloud services can potentially become a single point of failure when many financial institutions rely on them. The regulatory response to cloud computing has taken two forms.