When potential output rises slowly for structural reasons, growth will be weak even if economic policy is expansionary. In spite of devaluations and fiscal expansion with a view to boosting demand, growth has remained lower than in many other industrialised countries. This is an important lesson to bear in mind when discussing monetary policy’s functions and tasks. Other economists have been less interested in why employment has been slack and unemployment has risen and more concerned with unemployment’s tendency to remain at a high level. The observation that unemployment, having risen, tends to stick at a high level or falls back to normal levels only gradually is usually described in terms of hysteresis and BIS Review 38/1997  - 10 8  persistence. An explanation for the occurrence of persistence tendencies is provided by the insider-outsider model. Briefly, an increase in unemployment does not lead to wage restraint because those who have lost the jobs--the outsiders--exercise no influence on wage setting. Instead of a restrained wage rise, with lower labour costs and a possibility of taking on additional labour, the wage increases remain high and the outsiders remain out of work. 9 Strictly speaking, this does not constitute an increase in equilibrium unemployment but it still amounts to unemployment that is more or less permanent. In Sweden, wage increases tended to accelerate in the 1995 round of settlements even though unemployment was high. Statements by representatives of labour market organisations are indicative of a propensity to give real wage increases priority over increased employment.

The regulators should be mindful of high operational risks in these businesses and bring them to the attention of banks. 9. Uncertainties, regulatory challenges in promoting banks In a lighter vein, operational risks can be categorized into two, i.e. man-made risks (mistakes, faulty models, frauds, terrorism, wars etc.,) and god-made risks (earthquakes, floods, Tsunami disasters, electrical blackouts, telecom interruptions etc.) Some of these are well known and banks handle them in their own ways. Complexity of the assessment process and required changes to it, uncertainty in the implementation date of Basel Accord, the US and some European banks’ attitude towards implementing the Accord, variability in data reporting are a few factors that have created uncertainties in banks as well as regulators’ minds. I believe that these challenges can be overcome if banks can be encouraged to adopt a systematic approach as set out in Basle II. First and foremost, regulators have to get banks to commit to a risk mitigation cycle which consists of (a) risk diagnosis (i.e. prioritization of objectives, documentation review/meetings and building up of a risk control culture profile); (b) risk identification within a framework; (c) risk assessment and preparation of action plan; and (d) risk reporting. 10. The choice of the approach/models banks wish to adopt may have significant implications. Score card, loss distributions and internet modeling are some of the popular risk models. All of them have implementation challenges, in particular, skills shortage, non-availability of reliable data and suitable IT systems.