Banks must integrate customer protection in the risk appetite framework and in the three lines of defence. Of course, as with all cultural change, to be successfully implemented, it must begin at senior management level. In order to be able to develop and implement this new culture, it is essential for the governing bodies to be committed and actively involved in aspects such as the design and governance of the products sold by banks, as well as in training and changes to incentive mechanisms for sales staff. Credit standards: ability to pay vs. value of collateral. Apart from the strengthening of transparency and protection of customers, I would like to mention an aspect of the law which seems to me especially significant from a supervisory viewpoint. Specifically, the law requires lenders to assess the solvency of potential borrowers, sureties and guarantors in depth before entering into loan agreements. This quires them to evaluate, among other matters, their employment situation, present and future income, assets, available savings, and any other fixed expenditure or commitment they may have already assumed. Of course, as a supervisor I fully agree with all these requirements, which are absolutely necessary and obvious. However it is somewhat disheartening to have to see them specifically mentioned in legislation. The text of this law shows that on many occasions institutions relaxed their standards and basic principles excessively, in order to carry on lending. That does not say much for us supervisors either, since we did not react sufficiently to the weakness of credit standards.

In the academic literature, some have suggested that the central bank can increase economic stability or reduce the negative effects of slow price adjustment by stabilising an index with fewer prices and weights other than those in the consumer price index.3 Prices that adjust slowly should have a relatively higher weight than prices that change quickly. Prices for goods and services where labour costs are a major component often adjust slowly.4 Labour costs are very important in these indices not only because they change slowly but also because they react to cyclical movements and are seldom exposed to extraordinary disturbances. 3  See Aoki, Kosuke (2001), “Optimal Monetary Policy Responses to Relative Price Changes,” Journal of Monetary Economics, Vol. 48, pp. 55-80, Arrazola Maria and José de Hevia (2002), “An Alternative Measure of Core Inflation,” Economics letters, Vol. 75, pp. 69-73, Mankiw, Gregory and Ricardo Reis (2003),“What Measure of Inflation Should a Central Bank Target?” Journal of the European Economic Association, Vol. 1, pp. 1058-1086, and Woodford, Michael (2003), Interest & Prices – Foundations of a Theory of Monetary Policy, Princeton University Press. 4  Angeloni, Ignazio, Luc Aucremanne, Michael Ehrmann, Jordi Gali, Andy Levin and Frank Smets (2004), “Inflation Persistence in the Euro Area: Preliminary Summary of Findings”, presented at the ECB’s conference on inflation persistence in the euro area, Frankfurt am Main , 10-11 December 2004. BIS Review 43/2005  3  Another topic currently of interest to academic research is whether a price level target may be better than an inflation target.