rate can take place over time. time is, after all, a major help in this respect. implementing systems changed as part of the software obsolescence cycle may involve only modest marginal cost. more immediate and discrete changes are always going to be more costly. these issues will clearly need further discussion. in the eu context, however, it is particularly important that the arrangements for revising any directive reflect, if not the letter, at least the spirit of lamfalussy. it would be wholly inappropriate to try to hard code all the detail of the pillar one rules in an eu directive, as if these can necessarily stand for a long period of time. i should say that the costs of implementing basel ii will not fall on banks alone - nor will the challenges. in most jurisdictions, regulators too will both face challenges and need to incur costs in expanding staff numbers, in training and in implementing systems. this will be important for them to handle the new approach. after all, it calls for a significantly greater level of expertise on the part of line supervisors than has the existing basel accord. and whilst the uk, and a few other jurisdictions, do have that expertise, we need to remember that we are looking at a global market place. and at a global level i detect a deficit of expertise which will require to be remedied. pillar three and disclosure i would also like to say a few words on pillar three. pillar three can, it seems to me, play two roles. first, of course, it can play a role within the basel ii context itself, by mitigating the need for complexity in pillar one. disclosure about the way organisations actually manage their risks can indeed help a better understanding of their risk profile, compared to a study of complex numbers on their own. for example, understanding how a firm conducts its stress testing, or how valuations might be sensitive to different assumptions, could be of real value. but, second, such disclosure could be of value in the general accounting context itself. this gets to the complexity versus disclosure debate in the search for a better way forward in that arena ; and should improve the ability of accounts to reflect changes in the underlying business. all of this is really to say that pillar three needs to be seen in a broader context. in today's'derivatised'world, the utilisation of derivatives and complex forms of contract, often with modelled valuation bases, is just about omnipresent. this is not

that ’ s because it ’ s the job of policy to respond to things that are unpredictable, in order to offset their effects, as best we can. so even if it ’ s the mpc that sets interest rates, in some narrow sense, it ’ s ultimately the economy that determines them. and our forecasts are intended not as some reliable guide of a particular policy path, but to help people understand how we see the nature and distribution of economic risks over the future. broadbent ( 2014 ). bis central bankers ’ speeches chart 3 policy decisions better correlated with economic growth chart 4 controlling for growth, ir forecasts uninformative about policy source : ons, cbi, markit economics, bank calculations. source : ons, cbi, markit economics, bank calculations. the “ excess ” volatility of bond yields one way to think about the unpredictability of the future is to look at financial markets. prices of financial assets are in many ways the embodiment of forecasts : they depend critically on how people think the future will evolve. so every time the price of an asset changes, someone ’ s forecast has gone wrong, or at least has had to be revised 2. and as you know, asset prices change a lot! in fact, if anything, as the economist robert shiller observed many years ago 3, they appear to move too much. equity prices are more volatile than seems justified by the variability of corporate earnings, as least over the sample period he considered ; bond yields look to be more variable than reasonable forecasts of future short - term interest rates. economists have therefore presumed that asset markets are prone to “ time - varying risk premia ”. in the case of bond markets, these would take the form of variations in the so - called “ term premium ” – by definition the gap between yields and expected future short rates. and although the term premium has generally been positive – on average, longer - term bonds have yielded more than rolling over a sequence of short - term bills – it could also be negative at times. for example, if investors worry about growing ( if small ) risks of some very bad economic outcome, that would tend to depress the yield on safe assets to levels below the expected future short rate. people are prepared to pay over the odds to insure against such tail risks 4. unfortunately, it ’ s hard to distinguish these risk - induced movements in bond yields from those in the true expected