consider the sustainability of the developments in the banking sector and their compatibility with price stability. after the hard lessons we learned over the last five years, the case for benign neglect of asset booms and only picking up the pieces afterwards is not very attractive. the crisis experience supports rather the idea that financial excesses are better prevented as they happen than only managed after they have caused a recession. one option is leaning against the wind. that would mean taking the price stability objective in a more flexible way and paying more attention to asset prices in monetary policy formulation. but there are difficulties with that : one difficulty is the problem of detecting the credit cycle in time, and correctly timing the monetary policy response. another problem is that price stability might get too little attention. if the price stability objective had to be compromised because of the developments in the banks and in the financial markets, we would actually have a case of financial dominance. how can this be avoided? naturally, it is the quality of commercial bank management and the internal incentives built into the banks ’ management systems that are the first line of defence. but we have also learned that prudent management practices need to be supported by good and effective regulation. this leads to my other main point today. in today ’ s environment, the effective independence of monetary policy requires good regulation which ensures that the banking system as a bis central bankers ’ speeches whole remains stable and solid through the interest rate cycle, not only in times of tight monetary policy but also in times of very accommodative monetary policy. like the fiscal discipline of governments, which protects monetary policy from forms of fiscal dominance, effective banking regulation protects monetary policy from financial dominance. we can see how these prerequisites for independent monetary policy are as important for today ’ s accommodative monetary policy as they were for a disinflationary monetary policy when the concept of independence was developed. * * fortunately, major progress has been achieved in the field of banking regulation, not least in the euro area with the banking union. there are three aspects of the developing banking regulation that i want to mention in this connection. first, the prudential regulation of banks is now stronger and more uniform than before. banks ’ capital ratios have been strengthened a lot since the crisis, and the responsibility for supervision has been centralized at the ecb. this has already made banks more resilient in the face of any future shocks. the new bank recovery and resolution framework is also part of the

. instead, in the large advanced economies at least, the bursting of the bubble coincided with a contraction of private demand and a deep recession. the negative effect of the crisis on economic activity actually reduced inflationary pressures. the main problem has since then been how to prevent the deleveraging process from bis central bankers ’ speeches starting a deflationary spiral. in such conditions, monetary policy which eases the strain on the banking sector has at the same time supported price stability. now, almost five years later, do we have a trade - off between price stability and financial stability? by conducting a monetary policy of extremely low interest rates, combined with exceptional measures such as bond purchases, are we stoking asset price bubbles and encouraging too risky lending practices by banks? very low interest rates may encourage risk taking by the investors. this is actually one of the objectives. our economies need more productive investments. the low interest rate environment will also affect bank lending. this is also desirable, and it is hoped that business lending to job - creating smes will be stimulated. however, we hear worries that the incentives could be too strong. this is based on the fear that banks will finance investments which are too risky, or the stimulus could be unduly concentrated on, say, the real estate sector. of course, successful monetary policy requires a stable financial system. if stability is not there, the transmission of monetary policy can hardly work smoothly. this is one of the lessons of the financial crisis. * * here we see how the problem of possible financial dominance is manifested in today ’ s economic environment. now it is not the question can the banking system endure a hard, disinflationary monetary policy. we must pose the question in another way : how can we make sure that the banking system is able to operate prudently under a monetary policy that seeks to maintain price stability “ from below ”, with an accommodative, even expansionary stance? there was a famous discussion on how monetary policy should relate to credit booms and asset prices in the jackson hole conference of 2007. at that time, the prevalent thinking in central banking circles was what it is better for monetary policy only to “ clean ” ( up after the bursting of the possible bubbles ) than to “ lean ” ( against the wind ). the strategy of the ecb includes the so - called second pillar of monetary analysis, which focuses on signals from money supply and credit creation. this means we are committed to