The European Central Bank, indeed, has always been very clear that its monetary policy decisions are not automatically and exclusively driven by its inflation forecasts. In particular, a close monitoring of money and credit trends – whose impact does not necessarily manifest in the inflation forecast at the two years horizon, but instead informs the assessment of inflation risks at the medium-tolong-term frequencies – plays an important role within its policy process. A key rationale for including a monetary analysis within the Euro area’s monetary policy framework has been to “cross-check” the signals coming from the so-called “economic analysis”, which typically pertains to the short-to-medium term, with the longer-term information coming from the evolution of monetary and credit aggregates. The financial crisis has led to a reassessment of the merits of the Euro area’s monetary policy framework, and its reliance on a thorough and broad-based analysis of the evolution of monetary and credit aggregates. As I previously discussed, indeed, long-term historical evidence shows that periods of output and inflation stability have often been associated with the slow but relentless build-up of financial imbalances. A key problem for the traditional position of just focusing on the inflation forecast at (say) the two-year horizon is that typically these bubbles burst only after having built up over several years, but meanwhile, most of the time they do not appreciably impact upon inflation projections.
The common interest is to keep the Basle standards at a level sufficient to ensure financial soundness, a minimum above which banks will choose to operate. To achieve this, we must fashion a set of standards that does not greatly distort incentives. Supervisors acknowledge that the current regulations and ratios need to be updated to be more meaningful, given the full range of risks banks face today. Supervisors are always challenged to keep pace with financial innovation and improvements in risk management practices, and this suggests that we will need a frequent monitoring and maintenance program for the present and future Accord. In closing, I would like to summarize the key supervisory objectives that we are mindful of as we look to revise the Accord and enhance the overall capital framework. Our first objective, of course, is to promote the safety and soundness of the financial system. Our second is to enhance competitive equality, while allowing for differences among banks based on  5  BIS Review 32/1999  differences in their risk profiles. These were the original goals of the Accord. Our third is to develop standards that are fundamentally applicable to banks of varying levels of complexity and sophistication, including those in emerging market nations. In developing this capital framework over the next year, we plan to consult closely with the financial and supervisory community and communicate openly about our progress. By yearend, we hope to have made great strides in furthering our objectives.