to judge the adequacy of firms ’ risk management processes and to induce more conservatism where this is needed, they must establish – continuously – where the frontier in terms of risk management practices is. and they must then set out expectations about changes that firms individually and collectively must make, and oversee firms ’ implementation of necessary changes. an extensive review by the main supervisory authorities of how the largest banks and prime brokers in the world manage their hedge fund related risks is now underway. separately, the hedge fund industry has begun to take steps to strengthen existing sound practice guidance, notably in the areas of risk management, valuation practices and disclosures to investors and counterparties. we will be following progress in these areas very closely in period ahead. 4. implications for monetary policy the widespread innovations in the financial markets that i just mentioned – the expansion in the use of marketable instruments, the rise of new players, the development of derivatives and structured products markets – have brought important changes in the way monetary policy is conducted, communicated and transmitted to the economy. first of all, the transmission mechanism is changing. while the effect of monetary policy on the availability and cost of bank credit is decreasing, monetary policy actions have prompter effects on a whole range of financial market yields and asset prices. the latter development may be positive, if our intentions are communicated well and correctly interpreted by investors. it could be detrimental, if it causes more volatility. our decision - making process is also changing. we have at our disposal a wide range of new information from asset prices, which enables us to gauge market expectations more carefully and take them into account. however, the interpretation of other crucial variables, such as monetary and credit aggregates, is more difficult than in the past, although by no means less important, and calls for renewed research efforts. let me address some of these issues in turn. 4. 1 monetary policy, asset securitization and the changing role of banks the role of the banking system in the transmission of monetary policy decisions to the economy – the so called “ bank lending channel ” – was once central. it is now rapidly diminishing. compared with the traditional way of thinking, this is a sea change. banks were previously at the centre of the monetary transmission process. the existence of asymmetric information on the quality of borrowers assigned a special role to banks in assessing firms ’ creditworthiness and providing external finance ; the sensitivity of banks ’ checking deposits to interest rate

inflation – will behave under different scenarios. policymakers will need to be humble about what they do not know, and to be creative and flexible in dealing with the changes to the traditional relationships that are rapidly taking place. conferences like this one are of vital importance to foster understanding of these developments and exchange views on what they mean for the tasks we face as central bankers. g. ferrero, a, nobili and p. passiglia, “ the sectoral distribution of money supply in the euro area ”, banca d ’ italia, temi di discussione, no. 627, 2006. a. nobili, “ a composite indicator for monetary analysis ”, banca d ’ italia, mimeo, may 2007.