The sensitivity criterion states that although near- and medium-term inflation expectations may respond to economic shocks, expectations of inflation far in the future should not. Well-designed monetary policy will generally allow for some response to shocks of short- and medium-term inflation expectations in order to balance competing objectives, but long-run inflation expectations should not be affected. In a formal sense, this criterion is about the very long-run response of inflation to shocks, but as shown in my research with Orphanides, the beneficial effects of anchored expectations on macroeconomic performance only occur when the inflation response to a shock is not expected to extend over many years. As Keynes admonishes us, in the long run we are all dead, and the notion of long-run expectations cannot be too long. This sensitivity criterion requires long-run inflation expectations to be invariant to shocks. In contrast, the level criterion applies the more stringent standard that the rate of long-run inflation expectations be consistent with the central bank’s long-run inflation target. In other words, it demands that expectations not just be anchored, but anchored to the right spot. These first two criteria are present in the FOMC’s statement on Longer-Run Goals and Monetary Policy Strategy, which stresses the anchoring of longerrun inflation expectations at the target level and recognizes that short-run trade-offs between inflation and economic activity may arise. The third criterion—uncertainty—requires that uncertainty about future inflation increases less than linearly with the forecast By continuing to use our site, you agree to our Terms of Use and Privacy Statement.

At the same time, it introduced an unweighted capital adequacy requirement – a leverage ratio, to serve as a nonrisk-based backstop to the risk-based capital requirement for banks. The FSB measures are aimed at improving the resolvability of systemically important banks. In particular, requirements have been defined for resolution planning and for the accumulation of gone-concern loss-absorbing capacity. These measures are intended to ensure that systemically important banks can exit the market in an ‘orderly’ fashion in the event of a crisis. 17 18  For example, cf. FINMA (2009), p. 19. Cf. FINMA (2009), p.30 et seq. 19  Cf. Branson (2011), p.5: ‘For several decades we believed that the greater sophistication of risk management techniques allowed us to tolerate thinner capital cushions. We were wrong.’  Page 8/14  b) Swiss TBTF regulations rest on two complementary pillars …  In Switzerland, parliament had already passed a package of legislation back in 2011 that recognises the special importance of the ‘too big to fail’ issue and is in line with the international approach. It is based on two complementary pillars with special requirements for systemically important banks. The first pillar defines measures to strengthen the resilience of these banks and thereby reduce the likelihood of a systemically important bank getting into financial distress. In particular, the revised regulations impose stricter capital and liquidity requirements on banks. They have to meet both risk-weighted capital requirements and a leverage ratio requirement. Equity capital allows banks to absorb losses, thus protecting them from insolvency.