Authorities have been tested and have established more effective mechanisms for addressing problem bank situations. Financial institutions have undertaken a range of measures themselves to improve risk management practices, operational controls, and core profitability. Some institutions have attempted to comply with international standards, notwithstanding lower domestic requirements. These reforms are especially important in light of the fact that the obligation to promote financial soundness rests mainly with financial institutions themselves. Taken together, these reforms indicate progress toward reduced systemic risk, heightened competition, increased banking services provided to the domestic population, and higher standards of conduct better approximating international standards. Work Ahead Notwithstanding this progress, much work remains ahead. While crises have motivated a great deal of reform in individual countries, and standards are approaching international norms, the international financial system remains a patchwork of varying standards and guidelines. While international disclosure standards have improved markedly in recent years, greater disclosure still is required, particularly with respect to bank asset quality, both in emerging and industrial countries alike. In seeking to make these improvements, however, we should avoid a “checklist” approach which may not address the risks of a given country and may soon become outdated. Improved disclosure will require more than a comprehensive framework. Accounting standards also need to be upgraded to reflect innovations in financial products and risk management techniques. The process of upgrading accounting standards, in turn, would benefit from greater harmonization of accounting standards that would facilitate comparison of global financial institutions and result in more uniform capital standards across countries.

At the end of 2022, the COVID-adjusted level of potential output (the black line) is 4.2 percent below the pre-pandemic projection for the fourth quarter of 2022, with nearly half of that shortfall explained by the COVID shock measure and the remainder a permanent change in the natural level of output (the gold line). In summary, according to the model estimates, the main longer-term consequence from the pandemic period is a reduction in potential output, but the imprint on r-star appears to be relatively modest. Importantly, there is no evidence that the era of very low natural rates of interest has ended. The Future of R-star? These estimates indicate that r-star today is about where it was before the pandemic. But where is it headed in the future? Of course, this is impossible to know with any certainty. One way to gauge how forecasters perceive the future of r-star is to use forecast data to estimate it. Figure 5 shows the HLW-based estimates of r-star in the U.S. through the end of 2024. It uses published data in the first quarter of 2023. The May 2023 Blue Chip forecasts for inflation, GDP, and interest rates are used as proxies for data from the second quarter of 2023 through the fourth quarter of 2024. The resulting estimate of r-star is about ½ percent in the first quarter of 2023, and subsequently falls to slightly below zero. Evidently, the value of r-star implied by private forecasts is, if anything, even lower than today's estimate.