While these measures have merits in safeguarding financial stability, they could have complex and cross-border impact. Even on the monetary policy front, unconventional measures are becoming more conventional. Central banks in the major economies have increasingly used unconventional monetary easing. Though necessary to stabilize their economies at this juncture, these policies have side effects of large and volatile capital inflows into Asia. This  BIS central bankers’ speeches  1  further complicates safeguarding of financial stability in other countries including Asia, and could, in turn, trigger some countries to resort to macroprudential measures themselves. Thus, in terms of policy space, we are dealing with a new paradigm of expanded policy tools, with new transmission mechanism, and requiring their own policy framework and governance. So we need to recognize the need for cross-border coordination as well as flexibility in execution given emerging uncertainty. Turning to the more medium-term structural issues, major regulatory reforms especially Basel III, Financial Stability Board reforms, and Dodd-Frank Act are still a known-unknown. We do know that they are designed to redress weaknesses that caused the crisis by enhancing capital and liquidity, while addressing the problems of procyclicality, and too-big-to-fail of SIFIs. For this, their merits are well recognized. But these reforms will reshape the global financial landscape and raise cost of financial intermediation. They will also have implications for cross-border level playing field, regulatory arbitrage, and alter risk profile of banks.

For example, if national central counterparty is not a viable and efficient model for a small economy, then the cost of hedging would increase with higher risk weight under Basel III. Meanwhile, if derivatives are cleared overseas, through regional or global central counterparties, we need to consider implication for cross-border supervisory coordination, financial stability, and development of local financial market and competition. On a related issue of Dodd-Frank Act, restriction on proprietary trading of US bank could impact the liquidity of US dollar markets abroad, as well as liquidity of foreign government bond markets which are the back-bone of their monetary policy operation. Another key issue going forward is the balance of authority between Home and Host regulators. There are concerns about the proposal of Financial Stability Board on cross-border resolution of Global Systemically Important Financial Institutions, or G-SIFIs. The concern is that some Host regulators may not be included by the Home regulator in the Crisis Management Group or resolution planning, even if the institution is systemically important in their jurisdictions. We are glad to see the FSB taking initiatives to identify potential problems. Now it is the time to work together on solutions in an inclusive manner. This is because the inclusiveness of the process assures acceptability and commitment, and reduces the uncertainty from unilateral action of individual countries. These international regulatory  2  BIS central bankers’ speeches  standards have no direct international enforcement power.