In such an environment, it requires a very courageous investor to be willing to step in against such a speculative tidal wave, regardless of how far out of line with reality markets may have gone. Pursuing sustainable exchange rate and monetary policies requires countries to devise defensive strategies against such forces. This is no easy task. Capital controls have been suggested by some. In Hong Kong’s case, such controls would be anathema to our free market philosophy: they are anyway prohibited by Hong Kong’s Basic Law (as they are, with effect from 20 December, in the Basic Law of Macau). But, even for jurisdictions that wish to consider the option, the practical problems are considerable. Traditional types of controls have impeded growth, and have proven difficult to administer. Attempts to impose capital controls may also foster evasion that undermines the transparency and integrity of markets. More recently, innovative schemes have been suggested aiming at taxing short-term capital inflows, or otherwise obliging lenders and borrowers to pay a price that reflects the risk to the overall economy of this activity. Some of these proposals are quite interesting and may be appropriate for consideration by some developing countries, especially those in the process of financial liberalisation. 3  BIS Review 53/1999  There are limits to the amount that regulation of short-term capital inflows can achieve. It would not, for instance, prevent massive speculative positions from being quietly built up in currency and stock markets. It would not stop manipulation of individual markets by large investors.

So, from a supervisory perspective, they were huge "black holes", including what has been called a "shadow banking system" where most of the excesses of securitisation took place. Not any more. During the last twelve months, a coordinated effort by industrialized and emerging countries alike has brought most important financial actors under the umbrella of supervision. Principles and rules have been enacted for rating agencies to deal with their conflicts of interest, enhance their rating process, increase transparency and their oversight through compulsory registration. Hedge funds will go through a process of licensing and oversight: they will have to meet transparency requirements towards both investors and regulators. Finally, off balance sheet activities will be consolidated and disciplined through changes in the accounting and prudential frameworks. The nature of financial regulation and supervision is changing. Here, I see two major trends. We must complement micro-supervision with macro-financial supervision, taking into account the systemic importance and interconnectedness of institutions, markets, instruments and the cumulative risks and dynamics which they create. System-wide phenomena that went unchecked, such as the aggregate rise in leverage and maturity transformation, must no longer escape our vigilance. All countries are moving in that direction. In Europe, following the de Larosière report, we are creating a European Systemic Risk Board. In the United States, it has been proposed that the Federal Reserve will become the future systemic supervisor.