system. if the banking sector engages primarily in straightforward credit - extending and deposit - taking activities, a system geared toward intensive credit review and transaction testing may be more appropriate. certainly the years of regulatory report verification and large scale transaction testing allowed our supervisory system to develop skills in assessing borrowers ’ ability to repay, verifying the adequacy of internal controls, and recognizing signals that reported information may not reflect the true condition of the financial institution. it is difficult to gauge whether, without this experience, we could have shifted effectively to our current risk management intensive system of supervision. another issue that receives a great deal of debate in this country and in supervisory systems around the world is whether a single regulatory body is most efficient for supervising financial institutions. as you are aware, the u. s. banking supervisory system is composed of a large number of regulatory agencies. the federal reserve has argued against the creation of a single regulatory body outside the central bank, given the valuable information that the supervisory process provides to us in maintaining financial - market stability. however, compelling arguments have been made regarding efficiencies created by housing the entire financial supervisory apparatus under one roof. in the case of developing countries, a central consideration is the structure and character of the government itself. in countries with strong traditions of bureaucratic control over economic decisionmaking, consolidating the regulatory function may prove counterproductive because that agency would have tremendous power and few checks and balances. further, such consolidation is likely to be a larger problem if the supervisory agency is not independent of other government functions. current issues facing global supervisors finally, i would like to discuss a key issue related to the supervision of foreign banking organizations that arises in a dramatic fashion every few years. this issue is the importance of ensuring that banking organizations maintain controls for their foreign affiliates that are sound and independent local management ’ s influence. history has shown that foreign affiliates are particularly vulnerable to internal control problems. the failure of barings bank and the losses incurred by institutions such as daiwa bank and, most recently, allied irish bank were directly related to a failure in proper control of foreign affiliates. in most cases these losses could have been avoided by ensuring that the bank ’ s control procedures - - for example, segregation of duties and the conduct of thorough and independent internal audits - - were functioning properly. even under a risk - focused approach, supervisors must ensure that bank management is providing adequate controls for all aspects of the business, even those that appear relatively

##ge between different regions. in the euro area, for example, greece ’ s unit labour cost competitiveness declined by around 30 per cent in the course of the 2000s. adjusting to this without the exchange rate as an equilibrating mechanism requires standard expenditure reduction policies. a number of euro area countries are now experiencing such pain. professor desmond lachman ’ s analysis of the eurozone outlook provides a thoughtprovoking perspective on the challenges that lie ahead. monetary policy and financial stability in the post - crisis era the crisis also had implications for how monetary policy is viewed. in particular, the role of monetary policy and its relationship with financial stability has come under intense scrutiny. during the 2000s, economists at the bis were at the forefront of warnings against a singular focus on price stability at the expense of financial stability. the previous economic adviser and head of the monetary and economic department at the bis, bill white, argued that such a focus, in the presence of low inflation, was likely to lead to the emergence of asset price bubbles. while many of his predictions proved to be correct, there is still much debate about the interaction of monetary policy and price stability, the practical implementation of these policies, and appropriate policy instruments. it is clear that the core focus of central banks has changed. it is no longer the case that monetary policy can be conducted in a vacuum, and there has to be a focus on financial stability issues. the challenge is to determine how best this is done. one has to determine what central bank measures are and what are not, and ensure that the core responsibilities and independence of the central banks are not overwhelmed or compromised. things will have to be done differently : central banks need to create better levels of knowledge and skill− perhaps also collect different data − or change the way in which they look at data. there is still no general agreement on what the role of the central bank should be with respect to financial stability or, indeed, what financial stability actually means. however, the discussions raise some important questions about the changes in the design of central banks, and possible changes in the relationship between a central bank and government. there needs to be an understanding of who is responsible for financial stability and how it should be executed. clear parameters need to be set and formalised arrangements made. there can be little doubt that the central bank plays a key role in financial stability. in fact, most central banks already have an explicit or implicit responsibility in this regard. the question is, however, should this