The crisis also left some lessons for the profession and the way we use our highly stylized models in policy-making. The narrow view is to think they are a precise description of how the world works, when in truth it is much more complicated. However, the other extreme view – and a very bad one for policy-making – is disregarding all that we have learned from academic work. We need to be humble about the extent of our knowledge, but we also have to be rigorous and serious about policies. 6  BIS central bankers’ speeches  References Acharya V. and H. Naqvi (2010), “The Seeds of a Crisis: A Theory on Ban Liquidity and RiskTaking over the Business Cycle,” mimeo, NYU. Bernanke, B. (2011), “The Effects of the Great Recession on Central Bank Doctrine and Practice,” speech at the Federal Reserve of Boston 56th Economic Conference. Bernanke, B. and M. Woodford (1997), “Inflation Forecast and Monetary Policy,” Journal of Money, Credit, and Banking, Vol. 29, No. 4, part 2, pp. 653–684. Davies, H. and D. Green (2010), Banking on the Future. The Fall and Rise of Central Banking, Princeton University Press. De Gregorio, J. (2007), “Defining Inflation Targets, the Policy Horizon and the OutputInflation Tradeoff,” Working Paper N° 415, Central Bank of Chile. De Gregorio, J. (2008), “La Gran Moderación y el Riesgo Inflacionario: Una Mirada desde las Economías Emergentes,” Estudios Públicos, N° 110, pp. 5–20, otoño. Galí, J. and L. Gambetti (2009), “On the Sources of the Great Moderation,” American Economic Journal: Macroeconomics, Vol.
As regards complex structured products, we insist on imposing certain prohibitions, and both Anatoly Aksakov and Nikolay Zhuravlev have already said this. We have been discussing at the Federation Council that we need adequate laws in this area. The second problem is high hidden fees in consumer lending. In the conditions of low interest rates, banks, regrettably, also get involved in dubious practices striving to increase their interest income. Some banks ‘conceal’ the actual cost of a loan in insurance premiums and fees, while their amount may reach up to 50% of the loan cost. Often, people are unable to understand how much they would have to actually pay for a loan. Therefore, we are proposing a new approach to calculating the effective interest rate and hoping to be supported by legislative authorities on this issue as well. The new approach implies that the calculation will cover all additional services and insurance options approved by a borrower. As a result, a client will receive exhaustive information. Furthermore, as loans with a high effective interest rate involve higher capital requirements, banks will be less interested in granting so expensive loans. 5/7  BIS central bankers' speeches  The third topic is floating interest rates on retail loans. Banks want to be capable to efficiently manage their interest rate risk. Indeed, we appreciate that banks are careful in controlling their interest rate risk. This risk should never be underestimated. Nevertheless, we believe it inappropriate to fully transfer these risks to retail borrowers, especially on long-term loans.