local currencies, the bank established swap arrangements for australian and singaporean dollars with the respective central banks last year, which should enable the bank to supply australian and singaporean dollar liquidity secured through these arrangements to japanese financial institutions facing funding difficulties in these two currencies. though the bank must be careful in avoiding moral hazard at financial institutions, it will continue to develop backstop frameworks for foreign currency funding in conjunction with relevant authorities. the new challenge of low profitability at financial institutions as we have seen today, much has been learned from the global financial crisis and various measures have been put in place to prevent the return of the crisis. while there are still gaps to be filled in every area, i should say that the global financial system has become significantly more robust than before the crisis. however, this does not mean that there are no more areas that require attention regarding financial stability. over the longer term, it is becoming important to cope with the potential risk of low profitability at financial institutions eroding financial stability. faced with low growth and low inflation in the years following the global financial crisis, many central banks of major economies adopted extremely accommodative monetary policy, including unconventional measures. as i noted at the beginning, such a policy stance itself reflects macroeconomic necessity, but the resulting plunge in nominal interest rates is negatively impacting profits at financial institutions through compression in interest rate margins. at this very moment, financial institutions around the world are still reporting respectable levels of profits, benefiting from lower credit costs in an improving economy and increased profits from selling securities for which prices appreciated as interest rates fell. having said this, if the low interest rate environment persists, interest rate margins will be further eroded and the profitability of financial institutions will suffer as a result. in japan, for example, financial institutions face structural headwinds including an aging and decreasing population ( chart 5 ). in europe, low profitability is regarded as a risk to financial stability in the context of a non - performing loans problem at some financial institutions. this shows that the problem is more or less global. there are various channels through which low profitability at financial institutions could adversely affect financial stability. one channel is the inability of financial institutions to accumulate sufficient capital due to low profitability. that would heighten the risk of banks'capital being eroded when large credit losses occur or when securities investments incur large losses in a volatile market. with thin capital buffers, financial institutions could become

these observations, for the rest of the time that i have today, i would like to explain how i understand the efforts aimed at strengthening the financial system following the global financial crisis and what the remaining issues are, from three perspectives : ( a ) international financial regulation, ( b ) macroprudential policy, and ( c ) the " lender of the last resort " function of central banks. i will then conclude by offering my views on an emerging challenge regarding the stability of the financial system ; that is, the profitability of financial institutions. stronger international financial regulations let me start with international financial regulations ( chart 1 ). in the period leading up to the global financial crisis, the financial sector, especially in europe and the united states, took on excessive leverage and the quality and level of capital were in decline. at the same time, many financial institutions depended on short - term market funding, which was also a contributing factor to the crisis. these experiences led to the adoption of the basel iii set of rules, the main thrust of which was to oblige internationally active financial institutions to enhance their capital levels and to hold safe liquid assets. the final details of the framework are still being worked out. furthermore, from the lesson of the dangers of moral hazard emanating from implicit public support of systemically important financial institutions, the so - called too - big - to - fail problem, these institutions are now required to hold additional capital to maintain total loss - absorbing capacity ( tlac ) and to draw up recovery and resolution plans ( rrps ) in case they face financial difficulties. these enhanced rules i have just described clearly have made the global financial system more robust. for example, looking at capital levels of financial institutions, the capital ratios of major european and u. s. banks have increased significantly ( chart 2 ). japanese financial institutions, while they did not directly suffer much from the crisis, also have increased their capital levels, in line with the stricter requirements at the global level. under the powerful monetary easing by the bank of japan, they are actively taking risks in lending and securities investment, thereby positively influencing the japanese economy and prices, which reflects in part their increasingly robust capital base. this clearly shows that the stability of the financial system is essential for monetary policy to be fully effective. having said this, i also should stress that stronger regulation ought not to lead to excessive restrictions on financial intermediation. as i said, details of basel iii are still being worked out