One policy under consideration is the macroprudential use of margin and haircut requirements.14 Setting margins and haircuts in a conservative or countercyclical manner may help to contain the excessive build-up of leverage. In addition to “leaning against the wind”, margin and haircut requirements can also improve financial stability by mitigating illiquidity spirals.15 This is particularly important given that an imbalance between the demand for and supply of liquidity could amplify or transmit shocks through the financial system. Conclusion Let me conclude. Since the ESRB’s foundation, Europe has strengthened its regulatory, supervisory, and crisis management frameworks. The ESRB has contributed to building a rich set of macroprudential policy tools for banks,16 and continues to coordinate the calibration of those policies. The European financial system has thus become more resilient, with greater loss-absorbing capacity. The financial system is also adaptive. Its adaptability is a strength, helping it to meet the challenges of the current environment. But it also means that policymakers must remain vigilant. The need for vigilance is why the ESRB has always warned against policy inaction bias. Macroprudential policy is still in its formative years, and policymakers are understandably cautious about deploying novel instruments. But when we see systemic risks, we should act. Greater risk arises from inaction. So as you listen to the presentations at this conference, think about the implications for macroprudential policy in a changing world. Is the macroprudential policy stance appropriate? Are the tools at our disposal effective?

Mr. Yam looks at Asian banking in a regional and global context Address by the Chief Executive of the Hong Kong Monetary Authority, Mr. Joseph C.K. Yam, at the ADB-IIF Forum on Developing Asian Financial Markets held in Fukuoka, Japan, on 10/5/97. I am pleased to be here this morning to address you on the subject of Asian banking in a regional and global context. I will be speaking particularly about banks in the East Asia region. The importance of banking stability 2. There is increasing international recognition of the importance of a sound banking system in promoting macroeconomic stability, sustainable economic growth and the efficient intermediation between savings and investment. The last few months have seen a series of initiatives by international financial institutions and groupings to devise principles, standards and strategies for the promotion of financial stability. While these initiatives have been directed principally at emerging markets, they also have application to the more developed markets which have been by no means immune from banking problems in recent years. A number of Asian economies, including Hong Kong, have participated in this work. This is a practical recognition that the setting of international regulatory standards must be a broadly-based process, in keeping with the global nature of today’s financial markets. 3. I do not need to belabour the point about the debilitating and disruptive effects which banking problems can have on economic and monetary management. The need to restore the capital of failed banks can impose a heavy fiscal burden.