On average the term structure of volatility is relatively flat, making this a reasonable approximation for the one-year volatility. 9  Hördahl, P. and O. Tristani (2007) “Inflation risk premia in the term structure of interest rates”, ECB Working Paper Series No 734, and Garcia, J. A., and T. Werner (2009), “Inflation risks and inflation risk premia”, ECB Working Paper Series, forthcoming. 10  Ciccarelli, M. and J.A. Garcia (2009), “What drives euro area break-even inflation rates?”, ECB Working Paper Series No 996. BIS Review 81/2009  5  particular, actual inflation readings are the main reason for movements in short-term BEIRs, but play no role in explaining long-term ones. Thus, the expected brief spell of negative overall inflation in the coming months does not seem to have no noticeable impact on longerterm BEIRs, thereby supporting the idea of well-anchored expectations in the euro area. At least so far. Overall, the evidence suggests that the euro area is a long way from generalised, persistent and expected deflation. The severity of the recession points to inflation remaining low in the next two years or so, but this is not expected to lead to the emergence of outright deflation. In any case, continuous monitoring is needed, as history shows ‘that deflation and deflation expectations can take root surprisingly quickly’. 11 The overall assessment is supported by a number of other indicators, in particular by developments in the labour market. In early 2009, wage growth remained fairly robust, although this may partly reflect hysteresis (slide 16).

My concerns arise from the fact that, while during the first G20 summit meetings, there was widespread consensus on the necessity of ensuring that no segments of the financial system are left outside the scope of the regulatory framework, over time, this resolve has dwindled and attention has mainly been focused on banks. Given the interconnectedness of markets, it is essential that investment banks, hedge funds and other institutions are also subject to adequate regulation. In particular, the supervisory authorities must have adequate information on the activities of these institutions in order to be able to evaluate vulnerabilities and possible contagion effects. The second line of action relates to the strengthening of the supervisory authorities, beginning with their independence. Only institutions independent not only of political authorities but also of market participants can have the clarity and the power to take measures to reduce the cyclicality of credit and financial activities. There are, therefore, concerns regarding the developments in the current  15  See, for instance, the Basel Committee of Banking Supervision, “Strengthening the resilience of the banking sector”, December 2009. 16  For example, in September 2008 the ECB announced higher transparency requirements, including the need for regular surveillance reports by rating agencies. In early 2009 it increased the rating requirement for newly issued ABSs to AAA at issuance and discontinued the acceptance of double-layer securitisations. In November 2009 it announced the eligibility requirement that, as of 1 March 2010, at least two ratings must comply with the minimum rating threshold applicable to ABSs.