of the world implicitly assumes that the equilibrium real rate is stable over time, whereas in fact it will move about. 6 sometimes the central bank will need to change its policy rate simply in order to maintain unchanged monetary conditions ( as proxied in the literature by r minus r star ). in the same vein, if near - term inflation expectations rise or fall, our nominal policy rate may need to change just to leave the actual short real rate unchanged. in other words, we can fix only one thing – the short nominal rate – but what any particular level of bank rate means for monetary conditions will depend on short - run inflation expectations and on the equilibrium real rate needed to balance the economy. both will likely have changed materially in the face of the cost and credit shocks. what our bank rate will mean for monetary conditions will depend on how it relates to the panoply of other interest rates on financial contracts. in fully efficient markets, the risk - free see neiss, k and nelson, e ( 2001 ) “ the real interest rate as an inflation indicator ”, bank of england working paper no 130. rate is a fully satisfactory summary statistic ; other rates fall into line through arbitrage, with differences reflecting risk premia. more practically, it can typically be assumed that the rates charged on private sector loans are maintained at fairly stable spreads relative to the riskfree yield curve ( ie given the expected path of the policy rate ). and, related to that, it can also typically be assumed that the degree of credit rationing in the economy is broadly constant over time. obviously, neither of those things is true at present. the most unusual, and stretched, circumstances lie within the global financial system itself. the premium on unsecured interbank lending has risen ( chart 1 ) ; and growth of such lending has slowed. this reflects a desire to hoard liquidity in a hazardous environment ; and heightened aversion to taking on unsecured credit exposures for term maturities. banks are, in consequence, deleveraging 7 their balance sheets. broadly, they can do so in two ways – raise extra capital, or shrink ( the pace of growth in ) their balance sheets. both have been underway. the balance sheet shrinkage is reducing the supply of credit to households and firms. but there is differentiation across the banking industry, according to size and strength. in that environment, spreads on corporate bonds are higher. many corporate and household lending rates have been

ewart s williams : the importance of adequate capitalisation in the insurance industry remarks by mr ewart s williams, governor of the central bank of trinidad and tobago, at the signing agreement between guardian holdings limited and international finance corporation, port - of - spain, 1 december 2010. * * * i wish to congratulate guardian holdings limited on the consummation of this very significant relationship with the ifc. this new partnership should not only strengthen ghl ’ s balance sheet, but should redound to the benefit of the public by increasing the availability of insurance products to markets that are not currently well - served and in this list, i include, small businesses, micro - finance institutions and agribusinesses. over the past several months the insurance industry has been overrun by a chorus of bad news involving institutions in which the central bank has intervened. unfortunately, even with its potential for contagion, the current turmoil obscures an insurance industry with tremendous strengths and resilience. the subsidiaries of the guardian holdings group are an integral part of this structurally strong and resilient insurance sector. since its establishment in june 1996, the guardian holdings group has blossomed into an integrated financial services entity, covering life, health, property and casualty insurance, pensions and asset management. ghl has spread its wings throughout the english and dutch caribbean and is now listed on both the trinidad and tobago and jamaican stock exchanges. guardian life, the flagship company of the group is a major player in the life insurance sector accounting for 38 per cent of the market ’ s contract liabilities. guardian general has become the region ’ s largest indigenous property and casualty insurance company. as the largest general insurance company in trinidad and tobago, guardian general holds 26 per cent of market share and 21 per cent of total assets of the sector. among the many best - practices adopted by ghl is the annual review by a. m. best to assess the financial strength of its insurance subsidiaries and to ensure that the companies are in a position to meet their obligations to policyholders. in june 2010, a. m. best gave a rating of a – ( excellent ) for the financial strength of both guardian life and guardian general. according to best, the excellent rating reflected ghl ’ s improved balance sheet, the decline in total debt and lower intangibles following the write - off of goodwill related to its european property and casualty operations, and its adequate level of risk adjusted capitalization. in the case of ggil,