Behaviour and culture influences operations at almost every levels within an organisation, ranging from decision making, strategic positioning, as well as risk appetite and risk taking. The risk-reward incentive structure has to focus more on long term gains rather than short-term profits, and the design of compensation scheme should fully reflect that aim. The strong culture of risk awareness and good governance should be rigorously instilled such that it becomes organisational culture and natural behaviour of bankers. Culture of transparency along with proper check and balance also contribute towards a solid foundation of banks’ immune system. The other area of immunity that will be key for financial institutions is immunity against cyber security risks. Everyone, every bank, every system must be prepared and ready to both prevent and respond effectively to cyber security risks. Incidents of cyber attacks, no matter how small, can undermine the integrity of the financial system. To boost the immune system, it is imperative that cyber resilience and cyber security be given the highest priority. Ladies and gentlemen, Financial stability could not exist without social stability, which brings me to my third and last point that requires collaboration from financial institutions. The economic benefit of growth has to be inclusive and financial system can play significant roles in promoting inclusive growth, starting with financial inclusion. The people at large must have access to basic financial products including payment, savings, credit, and insurance. The pricing has to be lower, choices wider, and access better.
Several inflation-targeting central banks (including the Bank of England, Norges Bank and the Riksbank) have for other reasons already extended their forecast horizon from the previously common two years to three years. There is nothing that in principle prevents an inflation targeter from considering forecasts beyond a three-year horizon, but in practice there is usually little information about anything at longer horizons except the tendency to revert to the long-term average. What about “leaning against the wind” (as advocated by, for instance, Borio and White, 2003, and Cecchetti, Genberg and Wadhwani, 2002), the idea that central banks should raise the interest rate more than what appears to be warranted by inflation and resource utilization to counter rapid credit growth and rising asset prices? It has sometimes not been quite clear whether advocates of leaning against the wind mean that credit growth and asset prices should be considered targets and enter the explicit or implicit loss functions alongside inflation and resource utilization, or whether they mean that credit growth and asset prices should still be considered just indicators and are emphasized only because credit growth and asset prices may have potential negative effects on inflation and resource utilization at a longer horizon. In the latter case, leaning against the wind is a way to improve the stability of inflation and resource utilization in the longer run. Then it is completely consistent with flexible inflation targeting.