They should identify the  1  See “Report of the Working Group on Capital Flows”, available online at: www.financialstabilityboard.org/ publications/r_0004.pdf. It was produced by a group chaired by Mario Draghi, and on which I served. 2  See “The external balance sheet of the United Kingdom: implications for financial stability?”, Senior, S and Westwood, R, Bank of England Quarterly Bulletin, November 2000, pages 351–64. BIS central bankers’ speeches  1  main economic risks to which they are exposed, either directly or indirectly (via the economy as a whole). Bank regulators should measure and monitor liquidity mismatches in banks, in the domestic currency and foreign currencies. If necessary, governments should act to strengthen banking systems and prudential regulation. Other parts of the private sector are generally not regulated, but they should be subject to accounting and disclosure standards which require transparency about the structure of their financial obligations and claims. An adverse signal from any individual indicator does not mean that a country inevitably faces crisis. Rather, indicators should be employed as warning lights, highlighting potential problems and prompting further investigation. A series of warnings may reflect escalating risks.” My purpose this evening, in the spirit of drawing lessons, is to recapture those insights in the light of our own, advanced-economy crisis. I shall review whether it is enough to look only at current account imbalances for warning signs, or whether gross capital flows, in particular cross-border banking flows, matter too. I will repeatedly come back to the importance of risk premia and balance sheets.

That being so, the question is what to do about the possibility that, occasionally, stimulating demand to offset macroeconomic damage from the crystallisation of one set of imbalances can fuel a new set of imbalances. The question is posed most pressingly about the US. But, in the UK’s recent monetary history, one finds a parallel in the debate in the early 2000s about whether or not there were limits to a strategy of stimulating domestic demand – principally household spending – in order to offset the effects on the medium-term outlook for inflation of pronounced weakness in external demand and business investment after the bursting of the Dot.Com bubble. Seen in that light, the central question becomes whether the authorities should have tools to check the evolution of stretched balance sheets, particularly in the financial sector, in the face of robust credit growth and asset price appreciation. This goes some way towards making the case for the “cyclical” elements of macroprudential policy. And that, of course, is a key destination for me this evening. When, more than a decade ago, the Draghi Report exhorted domestic and international authorities to monitor and maybe manage national balance sheets, the term “macroprudential” was used only by Andrew Crockett, Claudio Borio and their colleagues at the BIS.22 Now it is a buzzword – planned in the West and used already in parts of Asia and Latin America. Macroprudential policy: tempering but not obstructing financial liberalisation Plainly finance got out of hand. Not for the first time in history.