To ensure that new or further financial imbalances do not build up, we also need a tighter overarching international policy framework to address the stability of the financial system as a whole. A macroprudential policy framework should be part of this new framework. Macroprudential policy framework Financial market participants can trigger self-reinforcing economic fluctuations. Individual banks and investors do not necessarily take into account the overall risk in the financial system. The consequences became clear during the financial crisis: banks had inadequate equity capital, relied excessively on short-term wholesale funding and had insufficient buffers  12  BIS central bankers’ speeches  of liquid assets. The new international regulatory framework is intended to remedy this situation. Stricter capital adequacy and liquidity coverage standards are in the offing. The authorities will also be able to tailor banks’ capital requirements to the overall risk in the financial system. During upturns, these requirements can be raised, so that banks will have to hold more capital for their loans. This will smooth lending growth and better equip banks to bear losses during downturns. The authorities must acquire tools that allow banks to be wound up in an orderly manner. Banks must also draw up plans for their own liquidation in the event of difficulties. Owners and creditors – not taxpayers – must bear the losses. Politicians have the overriding responsibility for financial stability. It can be demanding to restrain credit growth in times of strong optimism and confidence in the future.

The Initiative includes studies on issues such as new securitised debt instruments, issuance of debt by international financial institutions, regional credit guarantees and enhancement facilities, and the establishment of local and regional credit-rating and credit-enhancement agencies. Another initiative, known as the Asian Bond Fund project, represents collective efforts of the Executives' Meeting of East Asia-Pacific Central Banks, or EMEAP, to broaden and deepen the bond markets in the region. The ABF project will bring about many benefits. First, it introduces and promotes new fixed-income products to the Asian markets. Secondly, it helps improve market infrastructure. Thirdly, the initiative has helped accelerate tax and regulatory reforms in both the regional and domestic markets. The Bank, with its mission as the region's development bank, is well positioned to assist emerging market economies in Asia to cope with the challenges of globalisation. In the past year, the Bank has contributed to the issuance of local currency-denominated bonds in India, Hong Kong, Malaysia and Singapore. The Bank is also providing valuable support to the Asian Bond Markets Initiative through the former Regional Economic Monitoring Unit, which is now known as the Office of Regional Economic Integration. Mr President, your decision to expand this Office and dedicate it to regional cooperation matters is most timely and welcome, as a well defined agenda for the Bank on regional cooperation will enhance financial stability by strengthening regional surveillance and cooperation. Despite these efforts, developments, and - dare we say it - successes, there are many challenges lying ahead of us.