key determinants of inflation : inflation expectations and the amount of slack in the economy. 3 maintaining a nominal anchor helps stabilize inflation expectations, which in turn means that rises or falls in inflation tend to be highly correlated with economic slack. thus, stabilizing inflation also helps to stabilize economic activity around sustainable levels. to see further how this process would work, consider a negative shock to aggregate demand ( such as a decline in consumer confidence ) that causes households to cut spending. the drop in demand alan greenspan ( 1988 ), statement before the committee on banking, finance, and urban affairs ( 746 kb pdf ), u. s. senate, july 13. two other important factors are import prices, which are determined by world market prices and exchange rates, and relative energy prices, such as the price of oil. however, a central bank has no control over world market or relative oil prices, and so adding these factors into the analysis does not change the basic conclusion here. leads, in turn, to a decline in actual output relative to its potential, that is, the level of output that the economy can produce at the maximum sustainable level of employment. as a result, future inflation will fall below levels consistent with price stability, and the central bank will pursue an expansionary policy to keep inflation from falling. the expansionary policy will then result in an increase in demand that raises output back up to potential output in order to return inflation to a level consistent with price stability. for example, during the last recession the federal reserve reduced its target for the federal funds rate a total of 5 - 1 / 2 percentage points, and this stimulus not only contributed to economic recovery but also helped avoid an unwelcome further decline in inflation. in other cases, a tightening of the stance of monetary policy is needed to prevent an " overheating " of economic activity, thereby avoiding a boom - bust cycle in the level of employment as well as an undesirable upward spurt of inflation. a strong commitment to price stability helps reduce fluctuations in employment and output in other ways. first, when inflation expectations are well anchored, a central bank will not have to worry that expansionary policy to counter a negative demand shock will lead to a sharp rise in expected inflation – a so - called inflation scare – that will then push up actual inflation in the future. thus, a strong commitment to a nominal anchor enables a central bank to be more aggressive in the face of negative shocks and therefore to prevent

. the bank frauds are primarily deposit related, advances related and services related. of these, the deposit related frauds which used to be big in number though not in size, have been on the wane, thanks to the improvements in cheque and payment processing, usage of technology and tightening the provisions of the negotiable instruments act. the advances related frauds continue to be the major concern for banks, especially because of their size and far reaching implications to their financial soundness and integrity. a special variety of frauds, which are increasing in number and in terms of speed, are the cyber frauds. yet another special type relates to trade or documentary credit related, special because of cross border implications. 7. when we discuss about bank frauds, we will not discuss about bank frauds committed by third parties which can suitably be classified as thefts. these types include cyber frauds committed by tricksters, or techsters. for our discussions, we will include bank frauds committed by some connected parties like the depositors, the borrowers, the users of bis central bankers ’ speeches bank services or by their own staff, their outsourced agencies, their vendors, their agents like assayers, valuers, auditors, etc. root cause of financial frauds 8. financial frauds, more specifically the advances related frauds, occur because of breach of contract and trust. it could be because of the pledged or mortgaged assets are compromised or divested off ; or the documents are forged ; or the funds availed are diverted or siphoned off ; or the documentary credits like the letters of credit or guarantees are misused, etc. 9. the root cause of financial frauds can be reduced to one single phenomenon. it is failure to know its somebody – i. e. failure to know its customer, or failure to know its employee, or failure to know its partner / vendor. bankers ’ response to frauds 10. what the fraudsters do not understand is the systemic response of banks when they have been tricked into facing the consequences of frauds. the bankers ’ reactions include withdrawal from lending, being risk averse, losing confidence in documentary credit, excessive collateralisation or documentation, demands on personal guarantees, collapse of need based lending systems like mpbf, tandon and chore committee norms, etc. these are in addition to the bankers ’ efforts to recoup the losses through higher interest rates and charges. the three ky principles