nout wellink : a new regulatory landscape remarks by mr nout wellink, president of the netherlands bank and chairman of the basel committee on banking supervision, at the 16th international conference of banking supervisors, singapore, 22 september 2010. * * * introduction and background good morning and welcome to the 2010 international conference of banking supervisors. i will start by thanking our host – the monetary authority of singapore. i would like to thank in particular mas managing director heng swee keat and his deputy, teo swee lian, and the staff of mas for doing a marvellous job of organising and hosting this icbs. it has been two short years since we last met in brussels at the 2008 icbs. in my opening remarks at that conference, i used the occurrence of storms and the need to build strong dikes as metaphors for the financial crisis and the need for a strong supervisory response. this morning i will reflect on our response to the recent financial storm, which is designed to protect against future crises. consider the extraordinary financial landscape around the time of the last icbs. in september 2008 alone : lehman brothers declared bankruptcy, the other large us investment banks converted to bank holding companies, fannie mae and freddie mac were nationalised, aig was brought back from the brink of collapse, fortis, the financial conglomerate, was broken up and sold, iceland ’ s largest commercial bank – and subsequently the banking system – collapsed, and many countries had to step in to provide massive support to their banks. this was the height of the crisis. since then, the financial and banking system have been stabilised and we are on the road to recovery. but this has come at a high cost : many government budgets have been stretched due to massive amounts of official sector support. there was a fundamental spillover from the financial crisis to the real economy. this resulted in lost wealth and a loss of jobs. it is not yet over and risks remain. while painful and costly, the crisis has nonetheless presented an opportunity to put in place longer term reforms that are needed to make banks and the financial system more resilient to future periods of stress. the basel committee has been at the core of this reform agenda, which was crystallised at the g20 leaders summit last year in pittsburgh. last year we also expanded our membership by doubling in size to 27 jurisdictions. we have benefited immensely from this broadened membership, both in terms of wisdom and legitimacy. this morning i would like to

the mechanisms operate that permit the central bank to determine the value of money – what is known as the transmission mechanism. for the most part, however, there is little knowledge of these very complicated mechanisms. the rapid development in the financial markets means moreover that the conditions for monetary policy are continually changing. it is therefore natural for the rules of action and strategies that govern monetary policy to be discussed and evaluated. i am going to begin by giving a short review of how the transmission mechanism is usually described and to discuss the changes that have taken place. against this background, i will then briefly describe how the riksbank conducts its monetary policy. what is the role of money? the quantity theory describes in a simple way how inflation is determined. in this theory, the price level is determined by the quantity of money in the economy. production is determined over a somewhat longer period by access to labour and by the development of productivity ; monetary policy does not affect production in the long term. it is intuitively easy to understand that at a given level of production the price level will increase if the quantity of money increases and vice versa if the quantity of money decreases. in an economy where only banknotes and coins serve as means of payment, the central bank can control inflation by determining the quantity of banknotes. this is conditional on the central bank knowing how much is required at a given price level in order for a particular quantity of goods to be produced and circulated - the speed or velocity of circulation must be known in order for a money quantity target to be used to control price movements. developments in the financial markets in general and of the payment system in particular have, however, led to a reduction in the importance of banknotes and coins as a means of payment, i. e. money. an increasing proportion of payment flows takes place by transfers between accounts and the ability of the central bank to influence the quantity of money in the economy is largely only through its ability to affect the demand for money by the general public. the quantity of money required by the general public depends on its demand for transaction funds for the purchase of goods, services and financial assets, which in turn is affected by the interest rates encountered by the general public. for instance, lower interest rates increase demand for money when businesses'demand for capital goods and households'demand for consumption increases. thus, demand for goods and services are both sensitive to interest rates and largely reflect one another. by controlling the interest rate, the central bank thus affects both the