is, unsurprisingly, more advanced here in the u. s. than in europe, given the stronger recovery and policy normalisation already under way. logically, this raises questions about the future use of unconventional instruments and the efficiency of policy regimes to deal with a possible future recession. the debate is embryonic in europe, as the recovery remains moderate, with economic growth and inflation only recently starting to gain momentum. furthermore, the debate will necessarily be more constrained given that the ecb ’ s hierarchical mandate, defined in primary law, confers absolute primacy to price stability over other secondary objectives. in fact, the debate about the dominant monetary policy regime – flexible inflation targeting ( fit ) – started immediately after the emergence of the crisis. there were doubts about whether the narrow objective of monetary policy had allowed the crisis to develop by not reacting to the signs of financial instability and asset price booms. the question about the integration of financial stability concerns into the objective function of monetary policy has stayed with us, in spite of the fragile consensus that such concerns should be the purview of macroprudential policy. more recently, further doubts about fit arose over the inability of monetary policy to engineer a 1 / 6 bis central bankers'speeches quicker recovery, strong enough to bring the economy back to its previous trend. besides placing too much faith in monetary policy, this also opens the discussion about the targets of monetary policy. changing central banks ’ targets in that discussion, a popular proposal is to adopt a target for nominal gdp. there are clear merits to nominal income targeting from a theoretical perspective, since it is a close approximation to the optimal policy prescribed by standard macroeconomic models. under perfect credibility, such a target is fully consistent with maintaining price stability in the medium run. 1 the proposal made by meade, back in 1978, has had many illustrious supporters. 2 it offers the rationale to accommodate cost or supply side shocks that impact inflation and would have led to more expansionary policies since the crisis to counter the growing gdp deviation from the previous growth trend. the proposal faces, however, considerable practical difficulties : from gdp data that is untimely and prone to revision to the demanding task of communicating to the public about a concept they do not directly experience. another implementation obstacle relates to uncertainty over potential output, which risks nominal gdp targets delivering higher inflation without any benefit for real economic activity. that said, as shown for instance by charles bean ( 2009 ), 3 the practical difference between nominal

that the capital ratios, however calculated, meaningfully reflect the bank ’ s ability to absorb losses. the second stage, then, is to consider how the second and third pillars of the new framework can be implemented. supervisors do not need to wait for the formal adoption of basel ii to start introducing or using the principles of the three pillars. on the contrary, incorporating these principles is excellent preparation for adopting basel ii in the future. for example, supervisors might choose to move towards a more risk - based approach to supervision, developing skills in assessing the quality of a bank ’ s risk management and its ability to assess risk exposures. at the same time, banks could be reminded of their responsibility to develop their own processes for evaluating their capital needs and a strategy for maintaining their capital levels, consistent with the principles of pillar 2. with regard to the principles of market discipline in pillar 3, supervisors may wish to focus initially on ensuring a baseline level of disclosures across all banks. this might include discussing with banks, investors, and other users of financial information their information needs and the tools available so that supervisors can tailor requirements accordingly. in my view, these two preliminary stages provide an excellent preparation for the “ final ” stage of moving to basel ii. with a strong foundation in place, supervisors can then select the alternatives within basel ii that are most appropriate for their own circumstances. conclusion to conclude, let me insist on the general principle on which i think supervision should be built, which i mentioned before. supervision needs to consider a broader analysis of the vulnerabilities internal and external to the banking sector, including the necessary macroeconomic and institutional elements, and those relative to the stability of financial markets on which banks operate. i think that basel ii recognizes the importance of a combination of micro and macro factors for achieving greater financial stability. furthermore, i would say that basel ii incorporates some of the key basic principles that are also built in modern approaches to monetary policy : a flexible and forward - looking approach, anticipatory rather than reactive behaviour to risk, and the need to take into account market views. looking into the future, we must direct our resources to ensure that banking supervision in the 21st century is more dynamic, more preventive, more flexible, more inclusive, and more transparent. we should continue adapting and learning. i believe the ultimate objective of financial stability increasingly requires co - operation and properly aligned incentives on the part of the industry, markets, and supervisors. thank you.