other systemically important institutions, including providers of critical financial infrastructure. • robust crisis resolution frameworks. • ongoing monitoring and analysis of systemic risks, including in asset and credit markets ; and • appropriate coordination among the key policy makers. arguably most fields of public policy are unlike monetary policy in this sense. bis central bankers ’ speeches central banks and supervisors have been working to strengthen all of these elements since the crisis. internationally, there are clear benefits to collective effort in a number of these areas. in the area of bank regulation, for example, countries have a mutual interest in the development of common minimum standards to promote resilience for the global system as a whole. the basel iii package of capital and liquidity standards represents a major outcome of that cooperative effort 6. that brief outline might be thought of as capturing some important commonalities in the way various countries are approaching financial stability policy in the wake of the crisis. but there are also some significant differences in national approaches, especially in an organisational sense. that brings me to the fourth element of my outline, which is that of governance or, put simply : who controls the instruments? i have already made the point that one part of the instrument set – the management of financial system liquidity, or the last resort lending function – is inherently a function of the central bank. internationally, one of the areas of recent debate has been on the extent to which this and other central banking functions should be combined with prudential regulation, or whether they are best kept separate. and, if they are not combined, how can they best be coordinated, given the synergies between them? in current international practice there are a variety of different approaches to this question. australia of course is a jurisdiction that has an integrated prudential regulator separate from the central bank. other examples of that structure are canada and japan. the united states and europe have complex arrangements that fall somewhere in the middle. the uk has just completed a transfer of the prudential regulation function back into the central bank after separating them in the late 1990s. indonesia is in the process of shifting in the opposite direction. so clearly there are a variety of different organisational models. in many cases, including australia, central banks have a general mandate to use their powers to promote financial stability, even if they are not the primary bank supervisor. a key consideration in all of this is the obvious synergy between central banking activities, prudential regulation, and crisis management and resolution responsibilities.

at aggregating them or quantifying their likely systemic impacts. we do know financial instability when we see it, and we have a good idea of the kinds of behaviour that can contribute to it. the objective, then, is to manage these risks to an acceptable level. the second element is the set of policy instruments. here again, the position is much more complicated than it is for the inflation targeting framework. the potential instruments of financial stability policy are many and varied. one component i have already mentioned : the central bank's role in liquidity management. other instruments include the range of regulatory requirements that influence risk taking in the financial sector, like capital and liquidity standards. these are what might be termed ‘ structural ’ prudential instruments aimed at promoting a generally robust financial system. in addition there is a growing interest in the potential use of ‘ macro - prudential ’ tools in a time - varying and targeted way to respond to risks as they evolve. examples that feature in international debate include things like maximum loan - to - valuation ratios that might be targeted at cycles in property lending, or the counter - cyclical capital buffer incorporated in the basel iii standards, aimed at general credit cycles. in addition to all this must be added the capacity of prudential supervisors to influence and respond to banks'risk taking without the use of prescriptive rules. in australia's case i think we have been well served by apra taking a pro - active approach on this front to ensure that risks in the banking sector have been well understood and well managed. i think of this as a policy ‘ instrument ’ in my general schematic outline, but it is not one that can be easily quantified or formalised. the third element of my outline is the strategy. how are the instruments deployed to meet the objective? it should be clear from what i have said so far that the policy strategy in this area can never be as tightly defined or modelled as it might be in the monetary policy sphere 5. no one would seriously think of trying to use the equivalent of a taylor rule to summarise financial stability policy. but clearly the policy approach needs to include at least the following components : • appropriate management of system liquidity, including a framework for providing emergency liquidity in a crisis. • capital regulation to ensure well capitalised banks. • supervision to promote sound loan lending standards and guard against imprudent risk taking in the banking sector. • sound risk controls for