Adopting a more systematic and rigorous approach to assessing trust in the central bank may not only help address these shortcomings but also to acknowledge the full diversity of its responsibilities. I have already noted research stressing the relevance of credibility for the effectiveness of monetary policy, but credibility and public trust may be equally important for financial stability, the issuing of currency, or the generation of statistics. Moreover, one can conceive that trust across these functions could be somewhat connected. Loss of trust from a misconceived financial intervention or from distorted statistics may spillover to the way stakeholders assess the credibility of monetary policy. To foster trust, a central bank must go beyond the conduct of monetary policy to focus on how to develop reliability, adaptability, integrity, openness and fairness in its different areas of work. In the context of central banking, reliability is not equivalent to a dovish monetary policy giving priority to shortsighted demands to stimulate the economy, but to do the proper balancing of risks to align monetary policy with long-run social welfare. It means acting in a coherent way, showing thorough decision-making, carefully explaining reasons and arguments behind every action, conducing predictable decisions, and running efficiently the central bank as an organization. For this, I consider essential a clear framework for monetary and financial policy, data-driven decision making, unquestionable technical capacity and statistics, and skillful crisis management.

The third area of focus is the macro-surveillance of the financial system to monitor aggregate risk and identify structural change that opens up new vulnerabilities by making liquidity and capital regulations less binding, thereby exacerbating the procyclical financial behaviour. Important in this context is the subtle shifts in market due to financial innovation or changes in business model that effectively dilute or even arbitrage regulations that are designed to dampen procyclicality. In the current crisis, the combination of the originate-todistribute model, together with CDOs, unregulated hedged funds, and undercapitalized investment banks creates an interlinked market structure that adds vulnerability to the system, by effectively removing the liquidity and capital constraints of banks in underwriting loans and in investing in securitized products. Finally, the fourth area is to contain incentives in the context of remuneration to limit excessive risk-taking. The argument is that, in this crisis, misaligned incentives based on short-term performance did encourage excessive risk-taking and contributed to increased leverage. The solution under discussion is to align compensation scheme more with a longer-term prespective of risk and profitability, as well as to promote greater transparency of rewards and incentives through public disclosure. What I have outlined is an overview of the procyclicality issue and the direction that the current policy effort is taking to address it. My view is that, to be effective, a consistent set of policies at both the macro and the micro levels is needed to address the issue. As I noted at the outset, procyclicality is not a new issue.