Unicredit Group can probably be qualified as the quintessential European cross-border banking group, with operations in 22 European countries and, amongst these 22, in 19 Central and Eastern European countries. Alessandro is also the President of the European Banking Association. The last 2 to 3 years have been especially eventful for financial integration and stability, with once in a life-time developments. After Lehman Brothers filed for bankruptcy in September 2008, the global financial system experienced unprecedented stress and policy makers had to tread unknown territory in dealing with it. BIS Review 47/2010  1  The financial crisis has raised a host of policy issues that will provide food for reflection for generations to come. I will mention a few of them to set the scene and to kick-start the discussion. The first set of issues relate to the developments in the late nineties and early 2000s. The combination of high economic growth, ample liquidity, increasing financial integration and development, and “light handed” regulation sewed the seeds of the crisis to come. I believe that a number of people and organisations, including mine, identified vulnerabilities in the financial system before the crisis erupted. Nevertheless, we did not anticipate the timing and the intensity. We should ask ourselves what we missed in the run-up to the crisis and what the lessons are for the future. Once the crisis erupted in full force, a first casualty were the money markets, which provide the oil to make the banking system run smoothly. Money markets came to an unprecedented stand-still.

For example, recent work using the New York Fed’s Survey of Consumer Expectations shows a decline in longer-run inflation expectations by nearly half a percentage point over the last six years, to about 2-1/4 percent.7 This decline reflects both the low CPI inflation of recent years and demographic shifts, where members of older cohorts with high expectations (I’m afraid to say) die off. 2/4  BIS central bankers' speeches  If inflation continues to underrun target levels similar to the past six years, the downward trend in inflation expectations will likely continue. But there is still time to avert this fate—in this case, it’s fortunate that the young are impressionable. If inflation is sustained at target levels consistently, a further downward trend in expectations can be forestalled. But expectations depend on deeds, not just words, which brings me to the issue of accountability. One reason inflation targeting has been so successful at keeping inflation low and stable is that policymakers held themselves accountable for consistently delivering low inflation near the target. Finally, as well as holding ourselves accountable, policymakers need to be transparent and communicate their actions and the rationale behind them. Much has been made about whether central banks can credibly commit to future actions and outcomes, but the experience with inflation targeting gives me encouragement. Inflation-targeting central banks have proved beyond a doubt that they could bring inflation down and keep it low and stable. This was not a foregone conclusion, and initially there were doubts about whether inflation targeting would succeed.