Overall, the economy in the euro area stagnated. As in the last monetary policy assessment, we assume that the global economy will continue to recover slowly. This will be driven by globally expansionary monetary policy and strong domestic demand in the emerging economies. In the euro area and the US, developments are likely to be more subdued. Here we assume that the European financial and sovereign debt crisis will gradually ease. However, risks in this respect remain high. In particular, the difficult situation in Greece and Spain has already led to a significant deterioration in the  BIS central bankers’ speeches  1  confidence of households and companies in the euro area. As a result, the economic situation remains vulnerable. These high risks are also affecting the financial markets. Following a temporary recovery at the beginning of the year, the situation on the financial markets at present is again tense. A substantial correction has taken place on the share markets. By contrast, investments perceived to be safe, such as US, German or UK government bonds, recorded all-time low yields and correspondingly high price gains. Real yields on these investments are in negative territory for most maturities, measured in terms of inflation expectations. In addition, interest rates on money markets are at record-low levels worldwide. Swiss economic outlook In Switzerland, real GDP rose faster than expected in the first quarter.
While to some extent procyclicality is inherent in the financial system because risk is by its own nature cyclical, it is important to ensure that the regulatory framework does not amplify these fluctuations. Instead, the public sector should play an active role in mitigating procyclical behaviour as far as possible by enhancing the forward-looking nature of the regulatory framework. Concrete areas for attention that have been identified include certain elements of the fair value accounting rules and the implementation of the new capital requirements for banks and insurance companies. In the future, public authorities will need to be continuously aware of the importance of applying sufficiently long-term horizons for financial rules and prudential practices. Third, it will be necessary to pay closer attention to the growing importance and complexity of liquidity risk in the more market-based financial system. In this context it will be essential to ensure that prudent liquidity risk management of financial institutions provides an effective line of defence, also to pre-empt the moral hazard risk associated with a possible undue reliance of market participants on central bank actions. The experience gained from the financial market correction has indicated that the liquidity risk management of a number of financial institutions was not commensurate with their increasing exposure to liquidity risk from both the assets and liabilities side.