the relative rates of return in the different currencies is where it gets more complicated. indeed, even framing the issue in terms of relative rates of return, rather than in terms of funding and investing currencies shifts the focus. the papers at this symposium generally address these issues, coming at them from a variety of perspectives. a common theme across the papers is that banks aren ’ t the only players and that the arbitrage is not risk free, and perhaps at least as important, the arbitrage is not costless. the manner in which it is not risk free and what and how large the costs are, very much depends on who you are. in my view, there is not complete fungibility across all the various funding sources or the investment opportunities. not everyone borrows at libor on the one hand, or is willing or able to take on the credit risk of investing in libor on the other side. moreover, libor aggregates across different credit exposures, not all of which are available to a potential investor with a mandate with credit limits. beyond that, the composition of libor changes through time as the borrowing needs of global banks change. so there are measurement problems involving libor, which is often the interest rate used to measure the basis. 1 / 4 bis central bankers'speeches so, who are the various suppliers and demanders in the market and what are their constraints? a useful taxonomy is the following : banks, hedge funds, corporates and asset managers / real money pools, including central banks. each of these groups has varying degrees of flexibility to arbitrage the basis. they have varying constraints on how they can use their balance sheets, varying funding sources and varying credit appetites and limits which constrain the investable universe. there is a fundamental difference between a bank ( or a hedge fund ) that needs to fund itself to arbitrage the basis, compared to a real money investor, which may be naturally long in the funding currency. on the other hand, real money often has restrictions on the ability to take on leverage in the way that a bank doesn ’ t. real money can often be constrained in their ability to arbitrage the basis because their mandate doesn ’ t allow them to. in my experience, one of the fundamental laws of finance is to never underestimate mandate constraints. while the constraints on the various participants in the market vary, so do the potential risks. the risk that concerns me the most is

direction of more liberal trade policies. change is already occurring in that the western policy establishment is no longer pushing emerging market economies to move quickly to full capital account convertibility. as recently as october last year the imf, at its annual meeting in hong kong, was hoping to get its members ’ endorsement of a change to its articles to make it easier for it to encourage countries to adopt full convertibility. this proposal was not put forward at the 1998 annual meeting in washington because it was clear that it would not get support. there also seems to be greater tolerance for countries which have a generally outward - looking policy framework, but which have put in place some impediment to very short - term capital movements. i refer here to chile ’ s deposit requirement on foreign borrowing and to singapore ’ s and taiwan ’ s restrictions on their banks lending domestic currency offshore. the more important task is to get on with the job of improving the international monetary system, with the specific aim of reducing the degree of instability. some of this is the job of the emerging market countries, and in the first instance involves increasing disclosure by these countries ’ governments, companies and banks. as well as making markets better informed, and better able to judge the risks they are taking, the aim here is to make some progress on reducing the previously opaque links between governments, banks and companies, or, in other words, to improve governance. in addition, there is a lot of work to be done to bring the supervision of financial institutions up to standard - a task which will take a lot of personnel, training and time. these changes are extremely important and require a lot of effort on the part of the emerging market countries. they also mean that a lot of time - honoured ways of doing things will have to be replaced. this is bound to meet opposition, and it will require political courage as well as economic expertise to achieve results. it will be made a lot easier if the developed economies are also seen to be examining whether there are aspects of their regulations that are contributing to the instability of the international system. the most obvious reform here is to do something about the extent to which current regulations allow excessive leverage in financial markets. the immediate focus should be the close inter - connections between hedge funds, investment banks and commercial banks. the hedge funds have become the privileged children of the international financial scene, being entitled to the benefits of free markets without any of the responsibilities. our reconstruction of the transactions that hedge funds undertook in australia in june