For example, we could improve the resolution process so that less of a firm’s value is destroyed by the liquidation process. If we could reduce the difference in value between a firm as a going concern versus the same firm in liquidation we could reduce the severity of the cascade effect when financial conditions deteriorate. Sixth, we could make structural changes to the financial system to make it more stable in terms of liquidity provision. For example, consider the three structural issues outlined earlier that amplified the crisis – tri-party repo, collateral requirements tied to credit ratings, and haircut spirals. In the case of tri-party repo, the amplifying dynamics could be reduced by enforcing standards that limited the scope of eligible collateral or required more conservative haircuts. Formal loss-sharing arrangements among tri-party repo borrowers, investors, and clearing banks might reduce or eliminate any advantage that might stem from running early. Eliminating the market’s reliance on intraday credit provided by clearing banks could eliminate the tension between the interests of clearing banks and investors when a dealer becomes troubled. In the case of collateral requirements, collateral haircuts could be required to be independent of ratings. Many of these suggestions are already in the process of being implemented. For example, the Basel Committee is in the process of strengthening bank capital in four ways: 1) higher capital requirements; 2) higher quality capital; 3) more complete risk capture; and 4) capital conservation measures, including the use of contingent capital instruments.

So how should we cope with these challenges presented by the unprecedented scale of global excess liquidity? Given the global nature of fund flows and the increasing interconnectedness of the global financial system, it is obvious that national policies alone are insufficient to tackle the challenges. We need greater international and regional cooperation to manage risks posed by volatile capital flows to global financial stability. I believe there are three main areas for cooperation. 8. First is enhancing the resilience of the global and regional financial systems through financial regulatory reforms. A large amount of work in this area is under way at the G20, the Financial Stability Board (FSB) and various standard setting bodies – including but not limited to strengthening banks’ capital and liquidity requirements, reducing moral hazard posed by systemically important financial institutions, and reforming the OTC derivatives markets. Recently, the FSB decided to set up regional consultative groups, including one for Asia, to bring together central banks, finance ministries and regulators in different regions. These groups are expected to serve as a platform for us to discuss and cooperate on issues of interest to regional financial stability, and to reflect the region’s collective views to the FSB in the international standard setting process. 9. The second area is enhancing the global and regional financial safety nets. We welcome the recent significant augmentation of IMF’s resources and lending facilities. These enhancements will allow the IMF to respond more effectively and speedily to member countries in need.