but this could change as the global interestrate scenario develops. in this context, difficult investment decisions will need to be made. how to adjust asset allocations to evolving monetary normalization is a key question. should investors prefer a more risk - off, conservative stance, or hold tight and take a longer view, in which they have to tolerate greater volatility? how can they become more agile in the way they incorporate new information, modify their expectations, and make decisions? related to these questions are the investment time horizon and the definition of an optimal portfolio. in general, asset managers attempt to use targeted optimization models based on historical data. but history is not necessarily a good predictor of the future. bis central bankers ’ speeches a complicating issue is that in periods of stress, asset correlation is greater. indeed, recently, the assets that appeared likely to offer the benefits of diversification have performed in a way similar to that of other instruments. 1 these challenges are present in all economies. long positions in fixed - income assets anywhere in the world are bound to result in losses for investors as yields in advanced economies normalize. alternative strategies in equity or other real - sector assets could also suffer as financing costs increase worldwide. finally, currency risk is also likely to rise in many countries. emerging economies may face particular difficulty given high weights for their assets in international portfolios. currently, there is much discussion on whether it makes sense to participate or not in these countries from a risk - return perspective. in general, there are fears that eventual monetary normalization in the united states will affect all emerging economies as an asset class, but some nations are more prepared for the scenario than others, as always. 2 the situation of emerging economies may become even more complicated in the face of possibly slower recovery in the eurozone and lower growth in china, which might drag commodity prices down even further. this would be particularly daunting for many commodity - exporting countries. the challenges for financial authorities in emerging markets what should monetary and financial authorities in emerging markets do to prepare their economies for a rapidly complicating environment, given likely near - term gradual monetary normalization in advanced nations? they have at least two complementary policy avenues. one is to pre - emptively make their economies more resilient to shocks by strengthening macroeconomic and financial fundamentals. possible measures include improving the fiscal position, controlling inflation, and performing the delicate balancing act of bolstering financial regulatory and supervisory frameworks

achieved has enabled most financial markets in asia to absorb the destabilising implications of the recent global financial market turmoil. most importantly, there was no disruption to our financial intermediation process. this has not only allowed the markets to facilitate the transmission of policy but it has also supported the recovery of private sector economic activity. equally important has been the role of the central bank in addressing the build up of financial imbalances which would not only have an impact on financial stability, but also on macroeconomic stability. while interest rates have been an important tool to address the build up of such financial imbalances, most central banks in asia have placed greater reliance on macroprudential measures. prudential measures applied since the 1990s have been successful in containing the build up of such financial imbalances, thus reducing the risk to financial stability. the world going forward is likely to continue to be affected by financial crisis. history has shown that there have been more than a hundred distinct banking crises in these two recent decades. the prospect of surviving such a crisis is not only about building resilience but also having the capacity to manage it. the institutional arrangements for financial stability continue to be a key area of debate. the main issues have tended to centre on the role of the central bank in financial stability, and whether there should be a single or multiple supervisory authorities. given that the central bank is the lender - of - last - resort, the central bank is invariably in the frontline of the actions to restore stability. while there is no general agreement on the optimal structure for the supervision function, it is recognised that financial systems have become increasingly complex and interconnected. whether a country adopts an integrated model or a model that is organized along sectoral lines, effective coordination is critical to effectively safeguard financial stability. as the entity responsible for monetary policy, the central bank undertakes surveillance on macroeconomic conditions and in undertaking open money market operations and the management of international reserves, the central bank has direct contact with the financial markets. the central bank is thus able to gain valuable insights that contribute towards a more informed financial supervision, including in the design and implementation of macroprudential policy measures. the central bank is also best positioned to evaluate the tradeoffs should conflicting objectives arise. in such situations, a fragmented institutional arrangement frequently results in delays and compromises in policy responses. in addition, there would also be a lack of clarity of the accountability for the decisions. finally, the central bank also