Setting aside whether this is the correct interpretation of recent price moves, let me emphasize that such an expectation would be quite out of sync with both FOMC statements and the expectations of most FOMC participants. BIS central bankers’ speeches  3  Regional economic conditions Let me turn now to the regional economy, the focus of our presentations today. Our last briefing on the regional economy took place at a difficult time – soon after Superstorm Sandy. While economic life has returned to normal across most of the metro area, some of the hardest-hit areas are still struggling to recover and rebuild. Just blocks from here, in fact, the South Street Seaport business district is still far from business-as-usual. And there are many such neighborhoods across the metropolitan region, from the low-lying and coastal areas of New Jersey to Brooklyn, Queens and Long Island; from Staten Island to southern Connecticut. One encouraging sign, though, is that our broader regional economy has shown remarkable resilience. It has been growing and adding jobs at a reasonably good pace. Moreover, the rebuilding effort appears to be giving a bit of a boost to the job market in industries such as construction. As we’ve discussed before, the New York Fed produces economic activity indexes to help monitor the performance of New York State, New York City and New Jersey. Based on these measures, New York City has continued to grow strongly, and New Jersey’s economy has seen some pickup in growth since the beginning of this year.

Second, some life insurers with internal models have been growing in areas where the standard formula over-states the risks: in particular, illiquid assets within Matching Adjustment portfolios. Third, life insurers have been expanding unit-linked business and transferring an increasing proportion of longevity risk on new annuities business through reinsurance, both of which would tend to lead to faster growth in the best estimate of liabilities than capital requirements. In summary, the two benchmarks against which we compare internal model capital might not have been fully reliable measures of changing risks. Our ‘bottom up’ analysis of internal model outputs has also not suggested any generalised dilution of standards. Nonetheless, the significant reduction in internal model capital compared to the standard formula is not a trend we would expect to continue over time. We will be watching it carefully. 2  See Monitoring Model Drift and Standard Formula SCR Reporting for Firms with an Approved Internal Model, Prudential Regulation Authority, Supervisory Statement 15/16. 3 See Solvency II Regulatory Reporting: Internal Model Outputs, Prudential Regulation Authority, Supervisory Statement 25/15. 4  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  4  One counter-balance to any selectivity in insurers’ model development is the PRA having its own model change agenda. For example, over the past couple of years, we have asked life insurers to adapt their interest rate modelling to include the possibility of negative rates and we have pushed them to improve their modelling of default and downgrade risks in Matching Adjustment portfolios.