And we expect subsidiaries to be capable of accreting a portion of their own capital, rather than being fully dependent on a drip-feed of capital from the parent, as this creates poor incentives and can become problematic if the parent gets into trouble. We expect high standards of governance (including clear accountability for the management of local entities via the new Senior Manager’s Regime) and risk management, consistent with these firms’ importance to the financial system. At this juncture we have chosen not to apply either domestic system wide stress tests or local capital buffers to reflect the systemic importance domestically of these institutions. We instead seek to develop close dialogue and greater information sharing with the home regulator on the stress exposures they see for the group as a whole, and to allow us to judge how these will affect the UK entity. All this is cooperation. But what about the risk that this coordination and insight might disappear, particularly in the event of stress? How do we create committed cooperation? In that event, the ability to set internal TLAC is key. By turning debt into equity in the event of stress, internal TLAC gives host supervisors the ability to upstream losses in bad states of the world and so creates a binding commitment to downstream capital from the group when it is needed. Together with supervisory cooperation internal TLAC ensures the home regulator is fully sighted on and committed to act to mitigate financial stability risks inside the host country.
Luis M Linde: Brief comments on the interactions between monetary policy and macroeconomic adjustments Speech by Mr Luis M Linde, Governor of the Bank of Spain, at the XXXI Conferencia del Círculo de Economía, Sitges, 30 May 2015. *  *  *  Let me first thank Antón Costas, President of Círculo de Economía, for his invitation to participate in this final session of the XXXI Conference, which is a classic on our schedule of economic meetings and conferences. Many thanks, too, to Andreu Mas-Colell for accompanying us in this session, where we are joined by the Vice President of the ECB, Vitor Constancio, to whom it will be an honour for me to give the floor immediately after my address. First, by way of introduction, I should like to make some brief comments on the interactions between monetary policy and macroeconomic adjustments, one of the major matters raised in the euro area monetary policy framework in recent years. Long periods of very low inflation pose risks to medium-term price stability, to economic activity and to financial stability. The first of these risks is the de-anchoring of inflation expectations from levels consistent with price stability which, as we know, the ECB defines as an expected inflation rate below but close to 2% in the medium term. Being in the proximity of a deflation dynamic may encourage the postponement of spending decisions by households and firms.