In addition, and perhaps most importantly, the capital requirements have now become much more forward-looking. Each year a bank’s capital dividend and share-repurchase plan is assessed against the amount of capital the bank would potentially have under an extremely stressed economic and market environment given its portfolio of assets. The annual Comprehensive Capital and Analysis Review (CCAR) process has pushed U.S. banks to improve their capital planning processes and forced them, when needed, to retain more earnings and to build up their capital. As a result, these banks are much less risky now than they were prior to the financial crisis, when their vulnerability was masked by a high, but unsustainable, level of profitability. 1/3  BIS central bankers' speeches  On the liquidity side, there has also been significant improvement. The Liquidity Coverage Ratio and the Net Stable Funding Ratio requirements have forced banks to hold more high-quality liquid assets and have reduced the scope for maturity transformation. The ability and willingness of banks to finance illiquid, hard-to-value assets with short-term funding was an important element that contributed to the financial crisis. In addition, I believe that supervisory oversight has improved. There is more attention on horizontal evaluations across the systemically important firms and a greater emphasis on bank governance, risk management, cyber security, and bank data and technology capabilities than in the past. But the progress has not just been in terms of enhancing the strength of individual institutions. The system as a whole is also stronger because of a number of important initiatives.

Consequently, longer-term inflation expectations became unmoored, and nominal wages and prices spiraled upward as workers sought compensation for past price increases and as firms responded to accelerating labor costs with further increases in prices. That wage-price spiral was eventually arrested by the Federal Reserve under Chairman Paul Volcker, but only at the cost of a severe recession in the early 1980s. Since then the Federal Reserve has remained determined to avoid these mistakes and to keep inflation low and stable.” [http://www.federalreserve.gov/newsevents/speech/yellen20110411a.htm]  BIS central bankers’ speeches  5  Figure 15 shows two measures of inflation expectations, plotted alongside oil price movements. The red line shows what professional forecasters expected inflation to average over the next 10 years, at various points in time. Their expectations have declined somewhat over the past 20 years, but what is striking is the relative stability of their inflation expectations. In addition, there was no significant reaction to the oil price shock that we experienced in 2008. The chart also shows a second measure of inflation expectations – the University of Michigan Survey (the green line), which asks respondents about their expectations for inflation over the next 5 to 10 years.6 Again these expectations are not very responsive to movements in oil prices, and have remained quite stable over the past two decades. It is worth noting that countries can be affected quite differently by supply shocks. As Figure 16 shows, the importance of food in the “basket” of goods purchased by consumers can vary greatly by country.