find ways to circumvent measures that central banks and regulators have put in place. non - monetary tools like macroprudential policy will therefore not adequately address the root problem caused by interest rates that are too low. 18 under these circumstances, only monetary policy can “ get in all of the cracks ” to plug the vulnerabilities. an increase in short - term interest rates will trigger a more realistic evaluation of asset and collateral values, income flows, and thus risks. this will curtail the extent of leverage created by banks and capital markets and keep asset managers from crowding into risky assets. the effects of monetary policy are all - pervasive, and cannot be easily circumvented. 19 this approach, if formalised, amounts to augmenting the taylor rule with an additional term to capture deviations in financial variables from their equilibrium levels. 3 if financial market imbalances are growing, ceteris paribus, monetary policy should be tightened, even if it causes further deviations in output from potential in the short term. this approach does not preclude the need for robust financial regulation and supervision. but the key is to get the price of money right, to encourage a more realistic perception and tolerance of risks. 20 while no central bank currently implements monetary policy in this way, the concept behind the approach may not be as abstract as it seems. i know from my conversations with central bankers that they do not ignore financial stability considerations when setting monetary policy. why “ getting in all of the cracks ” may not always work 21 relying solely on monetary policy to secure financial stability may not always be sufficient. let me offer three reasons why. • first, monetary policy could be constrained by its traditional mandate : price and output stability. borio and zhu ( 2012 ) coined the term “ risk - taking ” channel of monetary policy to refer to the transmission of monetary policy through its impact on asset and collateral values, which would consequently influence agents ’ willingness to take on risk. the augmented taylor rule equation is : it = πt + rt + απ ( πt – πt ) + αy ( yt – yt ) + αf ( ft – ft ), where f is a variable * that measures financial market vulnerability, and f is the equilibrium level of that variable. bis central bankers ’ speeches * * * * • second, monetary policy could be constrained by global financial factors. • third, monetary policy may get in all the

are to maintain financial stability, we have to consolidate our efforts to build up a framework of cooperation and an appropriate division of roles between the authorities involved. these include the central bank, the finance ministry and the financial supervisory agencies. secondly, information asymmetry is one of the major factors working to increase financial instability so we must strengthen our efforts to heighten the transparency of the accounting and management information of financial institutions. lastly, financial market players tend strongly toward herd behaviour, which fosters the accumulation of risk factors and the spread of crises. in order to calm this galloping herd, the policy authorities should provide appropriate information on market conditions, so that players can decide upon the level of risk they wish to accept from a long - term and system - wide perspective. concluding remarks so far, i've briefly dealt with our experience of financial crises and the importance of macro - and micro - prudential surveillance, together with the tasks ahead. i am sure that this conference will provide a great opportunity to build up an effective framework for financial stability. thank you for listening so attentively.