The range of policy proposals that have been supported by G20 leaders and finance ministers, the Financial Stability Board, the Basel Committee on Banking Supervision, and international accounting standards setters, include calls for strengthening of micro- and macro-prudential regulations that aim at capturing risks of individual institutions and risk arising from interconnectedness of the financial system, as well as more robust governance framework. The shift in policy paradigm from this crisis has been the increasing recognition of the concept of macro-prudential policy in dealing with the problem of systemic risk posed by the interconnectedness within the financial system, as well as between the financial system and the real economy. The key macro-prudential policies are, for example, a proposal on build-up of capital buffer and the introduction of a simple leverage ratio as a supplement measure to the BIS ratio. We look forward to the BCBS’ proposals on these measures by the end of this year. While vital, this is a tall order, and demanding on supervisory capacity, especially in emerging markets. Let me highlight some of these challenges. The standards being discussed are complex, with still many unresolved issues on technical aspect such as calibration. Among the new guidelines, some key coefficients may be base on data of developed markets, and therefore might not be representative of emerging market conditions. Both calibration and actual implementation will require adequate data, which is often a constraint in emerging markets.

The patience gene thrives, the impatience gene dies. Natural selection results in a self-improving cycle, as with dieting, happiness and exercise. But there is a second equilibrium where this cycle operates in reverse gear. With a large fraction of momentum traders, prices deviate persistently from fundamentals. Among untested investors, momentum strategies now flourish while long-term fundamentalists fail. The speculative balance of investors rises, increasing the degree of misalignment in prices. The patience gene falls into terminal decline. Natural selection results in a self-destructive cycle, as with drug, alcohol and food addiction. 20  For example, McNamara (2004). 21  Christakis and Fowler (op.cit.). 6  BIS Review 114/2010  These self-destructive dynamics would have been familiar to economist, and some-time investor, John Maynard Keynes. He quipped: “markets can remain irrational for longer than you or I can remain solvent”. In the sketch model, a Keynesian dynamic selection process is at work. Myopic finance bankrupts the long-sighted. This echoes an earlier evolutionary game in finance – Gresham’s Law. Named after English financier Sir Thomas Gresham in the 16th century, this refers to the tendency for bad money to drive out good. The first paper money example of Gresham’s Law pre-dated Gresham. It came from China during the Yuan (1271–1368) period. Then, paper money drove out silver coinage. 22 This bad money dynamic has since been replicated across many monetary economies. China also provided the world with its first example of the reverse phenomenon – a selfimproving cycle of good money driving out bad.