Market intelligence is crucial here, in that it can provide us with near real-time information about whether and where these risks might be building (or eventually crystallising). So far, there is little evidence of excessive risk-taking on a generalised basis across the financial system. But the intelligence we have gathered during 2011, notwithstanding the recent pull-back in June, has flagged a number of pockets of increasing risk appetite and a few specific markets which have been showing signs of excess. That tendency seems to have been most prevalent in the United States, where the financial and real economy recoveries appear somewhat more established than in the UK and the euro area (Chart 12). But during recent discussions, some market participants have noted that this tendency has begun to spread to Europe as well. One example comes from the high-yield corporate bond markets, where demand has been very strong and where issuance, which reached record levels in 2010, has continued apace in 2011 (Chart 13). That is likely to reflect the generalised disintermediation of stricken banking systems – for those that are able to tap capital markets, bond issuance poses a useful alternative to bank lending. Moreover the extent of high-yield issuance may reflect the fact that it is smaller businesses, which are likely to be sub-investment grade, who are finding it hardest to secure affordable bank finance.9 Given oligopolistic banking systems like those in the UK, a deeper and more liquid capital market might help improve the supply of credit to UK businesses.

Nevertheless, the transmission of global monetary conditions to emerging economies is unavoidable given the open nature of the economies and the increasingly open and interconnected financial markets. To fully appreciate the changes in the global landscape since the Global Financial Crisis and the challenges and risks they entail, let me suggest five important developments that emerging market economies have been facing in conducting domestic monetary policy. First, global financial markets are more interconnected than before. Financial openness in 1/5  BIS central bankers' speeches  the Emerging Asia, as measured by the sum of assets and liabilities in the international investment position to GDP, has grown from around 800% of GDP to now more than 1000% of GDP. Emerging Asia cannot escape the vagaries of the financial markets around the globe. Second, global capital flows have increased in size and volatility. Cumulative non-resident capital flows to the region have reached USD2.1 trillion in 2016, compared to only USD400 billion in the period prior to the Global Financial Crisis. More importantly, capital flows have also become more fickle than before. Debt flows now contribute to 66% of capital flows. These flows are short-term in nature and carry higher propensity of reversals. Emerging markets had never experienced such phenomena before. Third, the volume of global foreign exchange trading has grown by more than four times in the last 15 years alone. The global foreign exchange market has become bigger, more complex and increasingly disconnected with economic realities. Today, exchange rate overshooting is the norm rather than the exception.