rate. yet there are some others, such as singapore or hong kong, who have already largely completed their productivity catch - up with the for a good discussion of this, see guonan ma and eli remolona ( 2005 ),'opening markets through a regional bond fund : lessons from abf2 ', bis quarterly review, june 2005, pp. 81 – 92 ( at http : / / www. bis. org / publ / qtrpdf / r _ qt0506g. pdf ). unhedged foreign currency debt, as was prominent in 1997, means that a fall in the currency pushes up debt servicing costs for the government, local corporates and banks, but a rise in interest rates to assist the exchange rate has the same adverse effect. policy - makers can then face a currency crisis and a banking crisis simultaneously. a government which borrows in its own currency and encourages private borrowers to do the same has more options when its exchange rate comes under downward pressure. 3 / 4 advanced economies, and the associated real exchange rate appreciation. the idea that these two – who, of course, have very different exchange rate regimes at present, but both quite successful ones – would easily find an acceptable exchange rate linkage with the others is not one that is intuitively obvious. this point is strongest for these two cases, but i suspect it generalises further around the region. moreover, most countries appear to me to remain determinedly focussed on the us dollar exchange rate. in other words, asia is unlike pre - emu europe. the prime motivation for the european countries'exchange rate policies was to build monetary and financial stability inside europe, rather than to follow a particular export - led growth model. in asia, it is still the other way around : countries want financial and monetary stability, but they seem to want this within a us dollar zone. presumably this is because they still place primacy on the export - led, fdi - enabled, model of economic growth, with focus on exports to outside the region. another difference with europe is that there is not a large bastion of economic stability within the region which is the obvious anchor for a currency arrangement. until the mid 1990s, japan might have been that country. but then japan experienced a decade of stagnation, deflation, and concerns over financial sector solvency. its government finances are also in a parlous state. hence it seems unlikely that japan could any time soon become

prioritise. so establishing the right incentives is key. one of the things that influences incentives is the consequences and penalties that apply when something goes wrong. strong penalties can play an important role in incentivising good behaviour, and this is an area we should be looking at. but we do need to get the balance right as there can be unintended consequences. in my view, it is worth making a distinction between the penalties that apply for poor conduct and those that apply for making loans that ultimately cannot be repaid. on conduct issues, we should set our expectations and standards high, and if they are not met the penalties should be firm. on lending, matters are more complex. even when banks lend responsibly, a percentage of borrowers will end up in financial strife and be unable to meet their obligations. we need banks to be prepared to make loans in the full expectation that some borrowers will not be able to pay them back. banks need to take risk and manage that risk well. if they become afraid to lend simply because of the consequences of making a loan that goes bad, our economy will suffer. so a balance needs to be struck here. more broadly, having clear lines of accountability can help build trust. the banking executive accountability regime ( bear ) is helpful here. this regime is, however, largely limited to authorised deposit - taking institutions and to prudential matters. it is worth thinking about how the same focus on accountability can be applied to a broader range of financial services and to conduct issues as well. as we do this, though, we should not lose sight of the fact that it is the banks'boards and management that are ultimately responsible for the choices that banks make. it is unrealistic to expect that an appropriate culture can be created through regulation and penalties. creating the right culture is a core responsibility of boards and management. changes that are now taking place within the financial sector should, over time, help restore trust, although it is likely to be a gradual process. the royal commission will have recommendations that should assist with this. one thing that would help is for financial 2 / 11 bis central bankers'speeches institutions to have a long - term focus and reflect that in their internal incentives. managing to short - term targets might boost the share price for a while, but this short - termism can weaken the long - term franchise value of the bank. we have seen evidence of this recently. i would argue that the franchise value