Policy changes are assumed to be for a period of 3 years and the effect on GDP is the average fall over that period. Without reciprocity, the CCyB does not increase resilience for 11% of domestic credit assumed to be provided by foreign banks. In addition, one-third of any policy-induced fall in domestic credit is offset by higher credit growth from foreign banks. Charts 4 and 5: International marketable debt flows have increased more quickly than cross-border bank flows Advanced Economies  Emerging Economies  Notes: Pink lines show cross-border loans and deposits from all BIS-reporting banking systems to residents in advanced or emerging economies. The blue lines show amounts outstanding of international debt securities. For advanced economies, the blue line counts issuance outside the market where the borrower resides, and in the case of emerging economies the blue line counts issuance outside the market where the parent company resides. Sources: Hoggarth et al (forthcoming), IMF World Economic Outlook, BIS International Banking and Debt Securities and Bank of England calculations. Chart 6: Portfolios flows to emerging markets have been as volatile as bank flows  Note: The charts show the cross-country median of the standard deviation of gross capital inflows (as a % of GDP) divided by the average size of capital flows. Sources: Hoggarth et al (forthcoming), IMF International Financial Statistics and IMF World Economic Outlook (for GDP data).
But I believe there are tools better suited to make the financial system more robust and I want to consider one of them – capital requirements – and how they might in future interact with monetary policy. More immediately, problems and fragilities in the banking sector remain and pose risks that the recovery in demand and activity we have seen across Europe – including in the UK – falters. But in the UK we have also seen CPI inflation rise to a level that is significantly above the inflation target. In recent months CPI inflation has begun to fall, but remains well above the 2% target level and that makes setting monetary policy difficult. We continue to face the problem of balancing risks: risks that inflation of 1.0pp–1.5pp above target lasts long enough to become ingrained in expectations and affect behaviour so that it is hard to bring down, versus risks that the recovery in output becomes weaker and then disappears, leaving inflation pressures lower than is consistent with the target further ahead. Since the financial crisis towards the end of 2008 economic policy has been unusually hard to manage. Both monetary and fiscal policy have been exceptionally expansionary. There has been an extremely large fiscal deficit. Fiscal policy is now being tightened. I look forward to the day when it will be appropriate to tighten monetary policy since a return to more normal levels of interest rates would be a welcome sign that economic conditions were also more normal.