This inherent risk can only be managed if all market actors, public and private, recognise their responsibilities for the system as a whole. The City has a special responsibility given London’s pre-eminent position in global markets, which is why it has already brought so many ideas and such energy to advance financial reform. 2 Financial reform is re-building real markets Reform is strengthening the resilience of major banks. Their capital requirements have increased ten-fold and their liquid assets are up four-fold. These banks’ trading assets are down by a third and intra-bank exposures by two-thirds. Reform is ending the scourge of Too Big To Fail. The combination of eliminating the implicit public subsidy and increased capitalisation will correct the distortions caused by the structural under-pricing of risk on banks’ balance sheets. And by making a further shift to market-based finance inevitable, it is increasing choice and competition – real market forces. Reform is also improving risk transfer by untangling the complex web of derivatives that meant failures like Lehman triggered chaos; and by creating simple, transparent and comparable securitisation markets. This reform agenda has increased the effectiveness of FICC markets and reinforced their social licence. 1  See Haddow, A, Hare, C, Hooley, J and Shakir, T (2013) “Macroeconomic uncertainty: what is it, how can we measure it and why does it matter?”, Bank of England Quarterly Bulletin, Q2. See also Bloom, N, et al (2014), “Really uncertain business cycles”, mimeo.

Inflation targeting, or following Svensson “inflation forecast targeting,” has placed the forecasting process at the heart of monetary policy decision-making. Under inflation targeting, the forecasting process centres around future price developments. This does not necessarily mean, though, that central bankers are obsessed with inflation. In fact, inflation targeting requires assessing all the available information, including real economic developments, monetary analysis and external balance of the economy, in a systematic and complex way. It is hence more demanding from this point of view than the alternative monetary strategies. The inflation forecast is not only an important internal decision-making tool, but also a crucial communication device. Monetary policy has become considerably more transparent over recent decades. It is now commonly believed that open communication of monetary policy is beneficial to the stability and predictability of its transmission into the economy, and is also crucial for the accountability of an independent central bank. As a result, the inflation forecast, including its underlying assumptions and policy implications, is openly explained to the public. Nonetheless, we must always bear in mind that even highly developed, technically advanced and wellorganised forecasting procedures are not an automatic pilot for inflation-targeting central banks. They are no more - but also no less - than an important input into the monetary policy process. Eventually,  BIS Review 11/2004  1  the decision is always based not only on the central forecast itself, but also on the decision-makers’ discussions about all the associated risks.