you know, is a textbook example of the “ moral hazard ” problem. central banks also face the problem of moral hazard. instead of contributing to financial system stability, the “ lender of last resort ” function of central banks could end up threatening that very stability by encouraging excessive risk - taking by banks. also, in terms of macroeconomic stability, it is sometimes pointed out that the recent financial crisis was partly attributable to what is sometimes referred to as the “ great moderation ” from the 1990s to the mid - 2000s, a period characterized by a favorable combination of low inflation and high growth, and a time of too much confidence in central bank policy, which contributed significantly to the moderation. as moral hazard is one of the most important topics of discussion for monetary policy, financial system stability, and regulation and supervision, i will return to it toward the end of my speech. iii. current state of the global economy and financial markets next, i would like to turn to the current state of the global economy, with particular reference to its effects on the business of insurance companies. developments in the global economy following the failure of lehman brothers it is now three years since lehman brothers collapsed in september 2008, triggering the financial crisis. developments in the global economy thereafter can be summarized into the following three points. first is the fact that the global economy has managed to prevent a depression that might well have been as severe as the one witnessed in the 1930s. this significant achievement can be attributed to the effective measures to stabilize the financial system and to the bold monetary and fiscal policy after the failure of lehman brothers. second, the global economic recovery has been bifurcated so far. emerging economies started recovering relatively soon after the crisis and have continued to post high growth. in contrast, given the significant downturns of advanced economies after the failure of lehman brothers, their pace of recovery thereafter has been slow. bis central bankers ’ speeches third, the downward pressure exerted on advanced economies by the repair of balance sheets is a root cause of their sluggish recovery. the global credit bubble in the mid - 2000s was incredibly large. when such a huge bubble bursts, balance sheets have to be repaired, or in other words, excesses in stock and corresponding debt have to be adjusted. furthermore, economic activity is restrained for the duration of that process. the sectors requiring balance - sheet adjustment differ according to the country : in the united states, it has been needed in the household and government sectors ; in

financial regulation and supervision, i would like to emphasize the importance of finding the right balance in various respects without relying too much on any specific methodology. this is based on the recognition that our knowledge is still quite limited with respect to the intrinsically complex mechanisms of the financial system, which continue to evolve in a dynamic manner. the need for humility is obvious when we look back on how bubbles have developed and burst in the past and how financial crises have followed thereafter. in terms of finding the right balance, it is first of all important to strike a balance between regulation and supervision on the one hand and the macroeconomy on the other. while regulation and supervision is, of course, important, the macroeconomic environment is also critical. our experience of financial crises clearly shows that various risks can accumulate in a seemingly benign macroeconomic environment and the materialization of those risks in the form of a financial crisis could end up causing significant economic damage. this is the sort of moral hazard that i spoke of earlier in which perceptions that risks have declined invite excessive risk - taking. in this sense, when conducting monetary policy we need to pay due attention not only to price developments but also to the accumulation of financial imbalances such as asset price inflation, leveraging and increasing maturity mismatch. second, the balance between regulation and supervision is important. business models of financial institutions differ by country and institution. against the backdrop of financial globalization and advances in information and communication technology, individual financial institutions need to flexibly adjust to changing business environments. given this, enforcing “ one - size - fits - all ” regulations for various types of financial institutions could increase the likelihood of adverse side - effects. in order to avoid this, we should rely more on supervision than we do today. we must design a comprehensive framework that better combines regulation and supervision. third, it is crucial to find the right balance by paying due attention to similarities and differences in the functions of various financial institutions. insurance companies are important providers of long - term funds to banks and other sectors. they can play this role because their liabilities are mainly long - term. this makes them less vulnerable to interest risk arising from maturity transformation and liquidity risk in comparison to banks. on the other hand, insurance companies have inherent insurance risk on their liabilities. as such, insurance companies and other financial institutions including banks have different functions and risk profiles. collectively and in complement to one another, these various types of financial institutions perform important financial intermediation functions