l. bini smaghi ( 2011 ) “ the challenges facing monetary policy ”, bologna, 27 january. bis central bankers ’ speeches financial assets. many emes are net savers and export capital to advanced economies. this is the result of various factors, not least the lower degree of globalisation of their policies and institutions. this limited globalisation can be seen particularly in the lack of independent monetary policies and the pegging of exchange rates, which leads to the accumulation of large foreign exchange reserves and to misaligned prices ( chart 7 ). as a result of these imbalances, interest rates in advanced economies may be lowered artificially, to a level which may create problems for their pursuit of price and financial stability ( chart 8 ). again, in most of our macro models the interest rate which affects global financial markets ( the so - called r * ) is anchored on the us economy. this is clearly not the case in reality as the us rate is affected by capital flows from the rest of the world which are evidently not easy to “ sterilise ”. the effectiveness of monetary policy is affected by such influxes. given that the us interest rate is nevertheless the reference for global financial markets, the reflow of funds produces second - and third - round effects on emes and on advanced economies ( chart 9 ). we are witnessing a paradox : emes as a whole are being inundated with short - term capital inflows, and yet they are net capital exporters. we have also failed to understand how these capital flows have increased the liquidity in the financial system and influenced the behaviour of economic agents. for instance, the impact that the pre - crisis low interest rate level had on the propensity of financial institutions to relax credit standards, to increase leverage and to pursue carry trades was underestimated ( charts 10, 11, 12 ). policy - makers not only ignored it but considered that this had nothing to do with risks to price stability, that it was related to financial stability and had to be addressed through prudential regulation. another issue which requires further discussion is the role that the financial industry has played in advanced economies. the conventional wisdom is that financial innovation and financial deepening promotes growth. however, the evidence is controversial and it is not clear to what extent the industry has benefited the long - term growth potential of these economies. to be sure, it has increased their fragility, especially with respect to their public finances. it

equally clear that the level of cost has been exacerbated by the uncertainties in the implementation timeline and the delays in the political process. these unnecessary cost overruns are insupportable. this autumn, the political process has one further chance to put this right. when it became clear that the solvency ii process had become temporarily stuck towards the end of last year, the central bank engaged in a process of consultation with the principal insurance trade bodies in ireland, including dima, the irish insurance federation and financial services ireland. we had a very frank and open discussion around the practical challenges caused by the delay in the directive and sought input from industry as to how to bis central bankers ’ speeches navigate through these issues. i was very pleased by the constructive engagement we had from industry at the time. there was quickly a meeting of minds on a central proposition : that it did not make sense for the central bank to move ahead in isolation on aspects of solvency ii implementation but rather that we should support the european - wide effort to continue to progress solvency ii. that has indeed been our approach and in fact is very similar to the approach taken by other regulators around the eiopa table. there is a common and welcome view that it would be counter - productive for each authority to head off in its own direction to fill in the gap while solvency ii is concluded. instead, there was a strong consensus in favour of actions at a european level to continue the preparations for the package of directives. this has, as you will know, manifested itself in eiopa ’ s initiative to publish interim guidelines to help prepare for the directive, so let me take a little time to describe these and the central bank ’ s approach to their implementation. eiopa has on 27 march published a consultation paper setting out its proposals for interim guidelines covering aspects of the solvency ii package relating to system of governance, forward looking assessment of the undertaking ’ s own risks ( based on orsa principles ), pre - applications for internal models and submission of information to national competent authorities. this package is an important initiative in a few respects. it provides a foundation for the ultimate implementation of the solvency ii framework and ensures effective preparation of industry and regulator alike. much of the solvency ii framework is already clear, so it is possible and indeed prudent to begin this preparation already, even if there are important loose ends to be resolved in the political process. in taking this action, eiopa