##bergen principle suggests that policymakers trying to achieve multiple economic targets need to have at least one policy tool for each policy target. robert mundell went one step further and suggested that each policy instrument should be assigned to the policy target on which it has the greatest relative effect. this may sound good in theory, but we know it is much more complex in reality given the multifaceted and often interconnected risks confronting us. for asean policymakers, how can we assign the tools available to us to our expanding objectives / mandates in the most optimal way? how do we avoid overburdening any single policy tool? if multiple tools are needed, how do we sequence them? is there a case to be made for an optimal order of policy based on prioritising of objectives? or is a pre - agreed sequenced policy order too restrictive? question 2 : rules versus discretion second, is the old question of rules versus discretion. while rules - based frameworks are easier to enforce and do not require recurring justification of explicit decisions once in place, a purely rule - based framework can be too constraining and rigid. the inherent rigidity reduces policy space for policymakers to maneuver in times of stress. on the other hand, while a discretionary, principle - based framework accords policymakers the necessary flexibility and space to maneuver, there is a risk that policymakers may overstretch this flexibility. perversely, there is also the risk of inaction by policymakers. i have always viewed policy making as akin to designing an earthquake - proof building, whereby the stability of the building ( the economy, in our context ) is not achieved by increasing rigidity, but by allowing flexibility. this pertinent question of rules versus discretion is one that we should continue to ask ourselves. question 3 : dealing with large capital flows : proactive or reactive? third, in dealing with risks emanating from large capital flows, is it better to be proactive or reactive? should policymakers pre - emptively lean against the wind to tackle capital inflows 2 / 3 bis central bankers'speeches before it manifests in the build - up of domestic imbalances, or should we take a more reactive stance by tackling domestic vulnerabilities and manage the fall - out from capital inflows? being reactive may be too late, but pre - emptive measures may be viewed negatively. i recognise that i have raised more questions than answers in my remarks this

them increases counterparty risk, with large possible losses ; it creates legal and reputational risks that can undermine the bank ’ s prospects for growth and even call its stability into question. this is before our eyes in a case now being clarified. an inspection that the bank of italy began at a bank in january of this year found that it had sold business customers complex derivative products, highly exposed to an increase in interest rates. owing to market developments, these derivatives have caused a sudden surge in the indebtedness of the customers who had bought them. the result was an increase in the bank ’ s exposure to counterparty risk as well as to legal and reputational risks. the bank of italy intervened ; it is following the case with the utmost attention. proper conduct, transparency and adequate organization are essential to every bank that alongside its traditional credit operations sells complex products. there must be a clear line of decision - making connecting top management to operating decisions and to customers ’ demands. transparency, proper conduct and the protection of bank customers the bank of italy ’ s supervisory provisions on compliance have been approved and will shortly be published. they lay down general principles, granting banks discretion in selecting the most effective organizational arrangements. banks ’ governing bodies decide the overall design of the compliance function and monitor its actual operation. in all customer relations, transparent and correct information increases the public ’ s range of choices, fosters competition and prevents legal disputes. lawmakers and regulators have become more responsive than in the past to the need to ensure correct relations ; banks themselves are rapidly becoming aware that the point is not only to defend and enhance the reputation of the industry, but also to gain an important tool of competition. as i have said on other occasions, it is appropriate for regulators to intervene where economic agents and the market are unable by themselves to ensure adequate standards. self - regulation, if based on agents ’ clear determination to pursue its underlying objectives, can be more effective than mandatory rules in many cases. the most powerful tool for pursuing the interest of consumers remains competition, which can function well, however, only if transparent terms and conditions are ensured and the obstacles to customer mobility eliminated. this requires rules at various levels ; statutory provisions, administrative regulations, self - regulation and competition are complementary instruments. i therefore take note with favour of the action plan abi has just adopted to improve relations with customers. the intent to capitalize on cooperation with consumer associations and the authorities is commendable, the declared objectives endorsable : to