a degree that a small distortion at one end of the world can quickly spread and affect the entire system. in 2008, the failure of a single investment bank in the united states sparked a global financial crisis and a worldwide recession. having acknowledged that financial crises today are global in scope, the g20 embarked on an ambitious agenda to reform global financial regulation. and they have made significant progress. the new basel iii rules will ensure that banks hold more and better capital. at the same time, new liquidity standards will ensure that banks have sound funding structures. these and other measures will make the global banking system more stable. however, there is always the other side of the coin : tougher rules for banks might lead to regulatory arbitrage where risky activities are shifted toward unregulated areas of the financial system. one current example is the growth of the shadow banking sector, where financial enterprises conduct business which creates bank - like risks but is either regulated insufficiently or not at all. bis central bankers ’ speeches the financial stability board estimates that the assets of non - bank financial intermediaries grew by us $ 5 trillion in 2012 and now stand at us $ 71 trillion. non - bank financial intermediaries represent about half of banking system assets and 117 % of global gdp. and china is no exception here. according to the imf, the size of the chinese shadow banking sector has more than tripled since 2008 and reached 35 % of gdp in march 2014. the imf estimates that china has the fifth largest shadow banking sector in dollar terms among those jurisdictions which are members of the financial stability board. a growing shadow banking sector is something regulators have to watch closely – not just in china but in other countries, too. shadow banking participants undertake maturity and liquidity transformation, they engage in the transfer of credit risk, and they operate with leverage. this means they carry out a range of bank - like functions which are associated with bank - like risks. at the same time, however, there are two key differences compared to the regular banking system. first, shadow banking participants and activities are not subject to banking regulation. second, shadow banking participants generally have no access to central bank liquidity, nor do they benefit from public backstops such as deposit insurance schemes. the consequence of this structure is a latent risk of runs on shadow banking participants. a run may lead to liquidity bottlenecks which can only be cleared by rapid deleveraging. that in turn may contribute to a collapse

setting, and specifies how. the communication should explain and convey, as clearly and precisely as possible, the objective and how it will react to any deviations from that objective. put simply, it should convey monetary policy ’ s reaction function, so as to avoid unnecessary uncertainty. this should give economic participants a better understanding of how monetary policy will respond to new information. thus, they can adjust their expectations about interest rates and inflation of their own accord, and hence their response to new information, such as an unexpected oil price hike. and because they do this, the central bank itself does not have to react as much to the changed economic setting. but what exactly does good central bank communication look like? how extensive and detailed does it have to be? it goes without saying that more communication is not necessarily better communication. complete transparency could also cause confusion more than it helps to shed light on things, simply because of the sheer amount of information. 4 nonetheless, central banks should communicate as precisely as possible, because if their signals are not clear enough, the result can be unwanted volatility in the markets, which can also spread to developments in the real economy. precise communication is especially important in times of great uncertainty, for example if, in response to a crisis, unconventional measures are introduced, used and finally terminated. by having a broad communication approach which uses various channels, the central bank can also prevent specific means of communication, such as the press conference, from receiving too much attention. 5 the press conference, in particular, shows that the financial markets react very sensitively to central bank communication. at the same time, however, monetary policymakers also keep a close eye on financial market indicators as key factors in the monetary policy transmission process. this mutual dependence between monetary policy and the financial markets can cause a problem. 6 this problem has already been vividly described by nobel prize winner paul samuelson, who once compared monetary policy to a monkey seeing its reflection in the mirror for the first time : the monkey thinks that by looking at that other monkey it is getting new information, when really it is just looking at its own reflection. 7 when the financial markets largely reflect central bank communication, the informative value of market signals is limited – and this increases the risk of incorrect monetary policy decisions if a blind eye is turned to these interdependencies. the bis ’ s economic adviser, hyun song shin, has also addressed the interplay between financial markets and monetary policy communication, and rightly points