Trust and reputation are valuable competitive assets for financial institutions, and the desire to preserve those assets creates a powerful incentive for firms to manage conflicts and compliance with exceptional care. Supervision and regulation, and the enforcement response to management failures, should help strengthen the incentives for a stronger compliance infrastructure, but they cannot insulate firms from the consequences of reputational damage. Financial innovation has made it possible for the market to assign values to a broader range of financial activities. And this, combined with improved disclosure, has increased the potential power of market discipline. But the increased complexity that comes with innovation also creates challenges for investor and counterparty risk assessment. Although the overall quality of disclosure has improved in recent years, along with accounting and auditing processes that underpin the integrity of disclosure, the complexity of public financial reporting can make it very difficult to discern the true picture of a firm’s financial condition and its exposure to risk. Financial innovation has also made it possible for risk to migrate to - and for leverage to accumulate in - parts of the financial system with less strong, or simply different, supervision, capital requirements, or disclosure norms. Risk today, on balance, seems to be allocated more effectively to those institutions better able to manage and hold it, resulting in reduced risk to banks and to the financial system as a whole. However, limitations in the extent of public disclosure over institutions that hold large amounts of risk make it hard to develop a comprehensive picture.

These interventions have largely succeeded in avoiding deflation and a cumulative fall in GDP during the most acute phases of the crisis. It remains true, however, that, contrary to past episodes which followed deep recessions, the current recovery appears sluggish, uncertain and fragile. The global growth environment remains affected by significant uncertainties. Today, I would like to reflect upon these developments and focus on the challenges facing central banks in the post-crisis environment. 1. Let me start with a few stylised facts The first, and most visible, is the spectacular expansion in central banks’ balance sheets. In all advanced economies, their size has been multiplied, over four years, by a factor of two to five. This is an unprecedented development. Beyond advanced countries, central banks in emerging economies have also, to a lesser extent, expanded their balance sheets, mainly, but not only, as a result of foreign exchange interventions. A second, and related, feature is the diversification of central banks’ interventions. Prior to the crisis, central banks would conduct monetary policy by determining the policy rate, and, in some countries, by imposing compulsory reserve requirements on banks. The crisis has led to the development and proliferation of so called “non-conventional measures”, with two objectives. First, to remedy financial market disruptions; and second, to provide further monetary accommodation once policy rates have been brought down to very low levels and hit the so-called “zero lower bound”.