lorenzo bini smaghi : lessons for monetary policy from the recent crisis speech by mr lorenzo bini smaghi, member of the executive board of the european central bank, at the roundtable “ l ’ euro e la crisi internazionale ”, milan, 19 january 2011. * * * introduction the financial crisis has been a very challenging period for policy - makers worldwide, not least for monetary authorities. central banks have lowered interest rates to levels close to zero and implemented a broad range of unprecedented non - standard policy measures. the recent experience offers, i think, five lessons from which monetary policy - makers can learn. let me list them upfront, before turning to each of them – in that order – in my remarks today. 1. central bank independence remains critical to delivering price stability, particularly during crises. 2. a clearly defined objective of price stability is essential to firmly anchor inflation expectations, which can act as an automatic stabiliser during a crisis. 3. monetary policy should be oriented to the medium term. trying to fine - tune monetary policy on the basis of indicators, such as output gaps and measures of core inflation, which are either subject to ex post revisions or are misleading, may – and often does – induce an excess short - termism and entail serious risks. 4. monetary and financial variables should be a key input in the assessment of medium to long - run risks to price stability, particularly during financial crises. 5. finally, price stability and financial stability are complementary. the new macroprudential function and monetary policy reinforce each other. 1. central bank independence remains critical the value of central bank independence is the first, lasting lesson. of course, central bank independence is a sine qua non of effective monetary policy, at all times and under all possible circumstances. if a central bank is not independent, policy - makers from other quarters have strong incentives to pass on to the bank problems and responsibilities for which they, in fact, are to be held accountable. this – always – leads to a blurring of responsibilities and potentially to a loss of trust, which ultimately undermines the effectiveness of monetary policy. 1 but in times of crisis the value of independence rises even further. in perturbed market conditions central banks may have to implement extraordinary measures, both in terms of reducing policy rates to unprecedented levels, and in terms of unconventional liquidity measures. if these measures – untested as they are – are to be expected to exert

are working hard and are making important progress on all these issues. but for these efforts to bear fruit, it is critical that the requirements that are imposed in terms of capital adequacy, liquidity and compensation be harmonized across regulatory regimes and applied in a consistent fashion. the absence of a level playing field would be a recipe for disaster. a lack of harmonized standards would inevitably lead to balkanization and protectionism as different countries took steps to protect their particular banking champions. potentially, this could lead to countries requiring capital and liquidity to be segregated locally. this would have a number of negative consequences. first and foremost, it could disrupt the ability for capital to flow freely across borders, interfering and inhibiting globalization in terms of financial intermediation. second, it would reduce the diversification benefits that stem from banks that operate in different geographic locations. third, it could undermine the safety and soundness of the financial system. in particular, the lack of harmonization in terms of regulatory regimes could lead to a “ race to the bottom ” as firms and businesses migrated to the most lax regulatory regime. so what does this mean for my audience today – foreign banks operating in the united states? first, these institutions should not expect a return to “ business as usual. ” we are committed to implementing the reforms that will prevent a recurrence of the recent financial crisis. second, as most of the current reform agenda of the financial stability board and the basel committee relates to the regulatory framework as applied by your home country, we expect that foreign banks ’ operations in the united states will fully comply with these structures as they are put in place in their home country as well. third, we support the continued international banking presence of global banking institutions. national implementation must not jeopardize the economic benefits derived from crossborder banking. we need to be wary about nationalistic approaches to supervision. fourth, financial firms that operate in our markets should continue to be vigilant in meeting the expectations we have for strong risk management and compliance practices. it wasn ’ t too long ago that some foreign banking organizations faced supervisory discipline for failing to meet those standards. given the lessons of the crisis, i would expect that our focus and attention on these areas would only intensify going forward. fifth, we will be particularly focused on how the new supervisory framework will apply to the u. s. personnel associated with the operations of foreign banks in the united states. in particular, we will have substantial