key motives for cross - border coordination are to avoid regulatory arbitrage on the one hand and to provide a level playing field for financial for a detailed discussion about coordination issues, see csajbok, a and j. kiraly ( 2010 ) : “ cross - border coordination of macroprudential policies ”, forthcoming in a chicago fed – imf conference proceedings volume. institutions on the other. i believe that this is especially true in the case of the cesee region as these countries are deeply integrated in the european banking system, with the branches and subsidiaries of western european banks being dominant players in the cesee domestic financial systems. home - host coordination is therefore of primary importance. if macroprudential policy stances substantially differ in home and host countries, this may encourage regulatory arbitrage. regulatory arbitrage stems from the feature of the globalised financial system that many financial transactions between two parties in the same country can in fact be executed in another country ( through e. g. subsidiaries / branches of internationally active financial institutions ). in a home - host setting for example, tightening the macroprudential stance in the host could be circumvented if the home stance is loose and allows for a re - direction of intermediation through e. g. branches. the flipside of this story, which gets less attention, is that a cross - border rechanelling of financial activity from a country with a tougher regulatory regime to a more lightly regulated one increases the potential for contagion to the more disciplined country ( think of the decline in share prices of the large internationally active austrian banks when the markets started to focus on their eastern european exposures ). while regulatory arbitrage seems to be a home - host issue, the “ level playing field ” argument for macroprudential coordination is probably more relevant in host - host relations. this stems from the fact that the financial systems in cesee countries often share the same parent banks. as a result they are to some extent competitors in the cross - border allocation of funds from parent banks. in such a situation, loosening the macroprudential stance in one host country might channel intermediation activity from another host. in addition to violating fairness, such beggar - thy - neighbour regulatory policies can lead to a mutually detrimental ‘ race to the bottom ’ regarding regulatory standards, 10 leading to the increase of region - wide systemic risk. in a nutshell, the case is strong in the

##ch. staying out of the eurozone did not prevent us from running into the boom. now that we have to face the bust, it is not clear either whether having an independent monetary policy places us in a better position to smooth the adjustment. that is because the effectiveness of monetary easing and the subsequent depreciation is seriously limited by the negative wealth effect on the sizeable unhedged foreign currency liabilities the private sector had accumulated. in short, with integrated financial systems, large capital flows have been taking place in new member states regardless of the fact that they have not yet introduced the euro. euro adoption does not carry an extra risk in this respect, on the contrary, it may help eliminate potentially dangerous currency mismatches. it is important to see that in this respect, it would eliminate a source of instability from the point of view of the eurozone parent banks as well. let me now turn to the implications the current crisis may have on euro adoption strategies. first, the crisis clearly illustrates that having your own currency may be more of a source of shocks than a shock - absorbing device. you may say that hungary deserved what it gets now, but there are other countries with more sound fundamentals that are undergoing serious stress. second, the crisis is an obvious indication that the years of abundant global liquidity are over. we are probably in the middle of a credit contraction globally and the chances of another credit - boom evolving in the foreseeable future are minimal. the risk of a credit - fuelled boombust, should a country enter the eurozone in the next couple of years, is greatly reduced. third, the crisis may have increased the disciplining power of financial markets. the deleveraging process that we are going through implies a thorough repricing of risk. just like in other asset classes, there is increased differentiation among government bonds based on the issuers ’ risk profile. this is well illustrated by the unprecedented differences we currently see between cds spreads on bonds of euro area sovereign issuers. countries with weaker public finances, and hungary is obviously one of them, will receive stronger incentives from the financial markets in the coming years to put their fiscal house in order. this means that the crisis may actually speed up the most important structural reform in hungary, the muchneeded scaling back of overly generous the welfare state. from the euro strategy perspective this would be good news, since, as i said before, we think that adopting the euro without going through this painful