So is this the new paradigm of known-unknown? That is, we know what the major drivers of change are, but we cannot forecast outcome. So the key strategic challenge is how to deal with Known-Unknown. For the short-term, the key priority is dealing with the fragile and volatile global economy. Stability is the priority for banks and regulators. The strategic policy question is how to get the right balance between risk and return, stability and growth. Weaker banks will retrench, leaving rooms for the few stronger banks to take up market share. In Asia, we have seen banks from the Asia-Pacific, notably Japanese, Chinese, and Australian banks moved into market space where European and U.S. banks have retracted. ASEAN banks are also shifting strategy to play a greater role to support their conglomerates in the regional expansion. If this regional banking trend continues, what are the implications for banks, regulators, and central banks? While the region has so far remained relatively resilient to the first round impact of European bank deleveraging, there is significant concern about the second round impact through the slowdown in global trade and economy that will impact growth. Another known-unknown in the short-term is the impact of interaction of various traditional and non-traditional policy measures, such as monetary policy, prudential policy including macroprudential. As a result of this crisis, the acceptable policy space has been significantly widened, for example, macroprudential policy now includes sectoral measures such as those to prevent property bubbles or to control adverse impact of capital flows.

The country is therefore saving today in order to consume in the future. Moreover, it is more profitable for Japan to invest abroad since there are fewer domestic investment opportunities and growth prospects are muted. Japan therefore exports capital abroad and has a current account surplus. There are thus structural reasons why countries have a current account balance above or below zero for an extended period. Surpluses or deficits therefore do not necessarily indicate an overvalued or undervalued currency, or present a risk for the country and the global economy. 5 How can we distinguish between those current account surpluses or deficits that can be explained by fundamental factors, and those that cannot? The IMF has developed a model for conducting a thorough analysis of the impact of various economic drivers on individual countries’ current account balances. These drivers include demographics, the level of development of a country, and fiscal policy – in other words, factors that influence savings and investment. The results of the model are incorporated into an annual report, the External Sector Report, which I mentioned in my introduction. Nevertheless, it is not enough just to apply the model in a mechanistic way. The IMF therefore also takes country-specific circumstances and features of balance of payments data into account in its assessments. In Switzerland’s case, it concludes that the current account surplus is in line with macroeconomic conditions and is not the result of an undervalued currency or inappropriate monetary or fiscal policy.