And the gold standard, which had functioned as a highly disciplined system for monetary policy, was a thing of the past. New, costly problems were encountered, as is clear from the numerous bank crises that occurred around the world in the 1980s and 1990s. It is in the light of these experiences that we are now engaged in erecting, step by step, a new financial architecture that will work in a world where capital adequacy requirements for banks are relatively limited at the same time as the financial system is rather free and open. Increased importance of risk management One function of a bank’s capital base is to act as a buffer for absorbing various types of disruption and risk. The greater the difficulty a bank has in identifying the numerous types of risk involved in financial activities, the larger its capital base needs to be. Otherwise, a sudden increase in risk may quickly render the bank insolvent. By the same token, the lower the stipulated capital requirement for financial operations, the more important it is to have efficient systems for risk management. The capital base in banking has, in fact, been strengthened to some extent in the past decade. When minimum capital adequacy standards for banks were specified in the Basel regulations in the late-1980s, they were met by protests from banks in Sweden as well as elsewhere. One of the criticisms was that the regulations would be costly.
The President, in the speech, precisely pointed out that looking to unemployment as an indicator of this slack in the economy, the unemployment rate now is 9.3%, according to the normal international standard of measuring unemployment; but if we adopt, as in the US, a broader concept of unemployment – which in the US they call U6 – then unemployment in the euro area is at 18%, where it is at 9% in the case of the US. Which would imply that the slack is then bigger than we could judge some time ago. That being the case, it justifies fully what the President said at the end of his speech: that we need persistence. If we want to bring inflation to our target of below but close to 2%, then we have to persist in the type of monetary policy that we have been adopting. But looking at the market reaction, the market took the speech quite hawkish, meaning concentrating on the optimistic comments about inflation, the economy, perhaps also the political tailwind. So is the market right to read your communication style as more hawkish than before? Constâncio: It’s always very difficult to interpret the reaction of markets. I will not try to say 1/3  BIS central bankers' speeches  rationalise or explain; the reaction of the market was what it was.