Benoît Cœuré: Structural reforms – learning the right lessons from the crisis Keynote speech by Mr Benoît Cœuré, Member of the Executive Board of the European Central Bank, at the Bank of Latvia Economic Conference 2014, Riga, 17 October 2014. *  *  *  Summary One lesson that we learned after the financial crisis is that achieving sustainable economic growth is always about both demand and supply. Moreover, policies that support demand empower policies that support supply, and vice versa. In the post crisis environment of a large debt overhang, partly structural unemployment and weak productivity levels, supply-side policies can increase the effectiveness of demand-side policies and help empower demand. By raising potential growth they create more space for spending (governments, firms and households). Additionally, by reactivating/reskilling the workforce, they allow employment to respond faster to higher demand. Finally, they ensure that higher demand is channelled towards the right sectors. While their long-term positive effects are undisputed, structural reforms, especially in times when monetary policy is at the lower bound, are seen to have negative short-term effects through increasing real interest rates. However, structural reforms can be effective in the short run as they raise expectations of higher incomes and cause firms to increase investment today and bring forward the economic recovery. Achieving a positive short-term impact from structural reforms depends on both the pace and composition of reforms. First, instead of the traditionally gradual approach, reforms need to be frontloaded (as e.g. in Latvia).

Good risk management as a competitive advantage The importance of Basel II lies not just in aligning capital adequacy requirements more closely with the way banks measure economic capital. The real payoff will be the positive impact it will almost certainly have - indeed is already having - on the risk management practices of institutions. Improvement in risk management will tend to enhance the competitiveness and financial success of banks. As suggested earlier, good risk management practices allow a bank to take more risks and improve profitability. Such practices foster better understanding of risks and allow the managers of banks to establish proper tolerances for the risks they assume. Good risk management allows banks to weather the unexpected shocks that occur from time to time. The danger, of course, is that as risk management practices improve, a bank’s risk appetite may increase disproportionately. Bank directors and supervisors must be vigilant against this possibility. 1  2  Basel I was officially implemented in 1992. BIS Review 42/2004  Main benefits of implementing Basel II improvement in risk management will materialise The risk management standards and practices embodied in the more sophisticated approaches under Basel II are real and are drawn from the best practices of large internationally active banks. They reflect many insights gathered through practical experience, including both successes and failures in risk management. Even for institutions at the forefront of risk management capabilities, we think the Basel II standards will be useful.