plays a key role in linking interbank markets in many countries, crucially depends on perceived settlement risk. in that regard, the continuous linked settlement ( cls ) mechanism, which started in 2002, proved quite effective. without such a payment - versus - payment service for foreign exchange transactions, the global financial system would have been in deeper turmoil through the amplification of counterparty risk due to further risks associated with time zone differences. of course, it is a hard fact that various limits exist in international coordination. first, measures to stabilize the financial system in each country have hastily been introduced without necessary harmonization between the countries. that has created some gaps in the range of government guarantees for depositors and creditors between the countries, thereby triggering sudden international shifts in deposits. second, financial institutions have been increasingly asked to serve for the domestic “ interests ” and sort of “ financial nationalism ” seems to have emerged. third, in some countries, the aggregated balance - sheet size of domestic financial institutions expanded far beyond nominal gdp, thus making it increasingly difficult to take necessary policy actions, including public capital injections. the observations i have just mentioned indicate the limitations in international coordination, in the sense that the global or world - wide optimum has not necessarily been chosen. like it or not, that is a reality and such limitations do arise for a couple of reasons. first, with public money injections, a government is in a position to pay more attention to taxpayers ’ interests, and naturally has incentives for ring - fencing interests of its own country. second, bankruptcy legislation for financial institutions differs between countries. as the bank of england governor mervyn king put it, “ global banking institutions are global in life, but national in death. ” 2 challenging conventional wisdom the limitations i have just mentioned are, for the most part, sort of a coordination failure due to the very existence of sovereign nations. we cannot deny the importance of making efforts to avoid a coordination failure, but it seems more productive for each policymaker around the globe to address the common factors causing crises. in that regard, we should take seriously the fact that the frequency of crises has increased in the last 20 years, and the crises have also become increasingly globalized. for those reasons, it seems natural to reflect on the relationship between that fact and conventional wisdom underpinning monetary policy, and financial regulation and supervision. put it simply, the prevailing philosophy among central banks and other policy authorities rests on three forms of “ pre - established harmony

financial institutions that traditionally put emphasis on the customer relationship is an important element in terms of “ information production, ” which is a key to conducting lending business, and could serve positively for businesses not only in japan but also in overseas including asian countries. furthermore, japanese firms and households, which are the main customers of japanese financial institutions, are not in need of balance sheet adjustments like those in the united states and europe. therefore, in terms of the competitiveness of japanese financial institutions compared with that of the u. s. and european financial institutions, i believe there is nothing to be pessimistic. with that recognition, what is necessary for japanese financial institutions is, at first, to hone their skills in identifying firms with growth potential and continue to strive to find new borrowers and also tap new fund demand from the existing borrowers. while a fundamental problem japan ’ s economy is faced with is a decline in medium - to long - term growth expectations, to overcome such problem, it is important that private firms promote their innovative activities and pursue a new source of growth at home and abroad. it is essential that financial institutions also firmly support such moves. in that regard, looking at the recent efforts by japanese financial institutions, there have been proactive developments to utilize their respective characteristics, which is quite assuring. the major banks have been further expanding their businesses in asian and other emerging economies regardless of customers ’ nationality, and the regional banks have been making efforts to tap growth areas in the regions, including distinct local firms. i hope that japanese financial institutions will establish their respective business models and pursue proactive efforts including tapping new fund demand, while skillfully gauging various changes in the business environment at home and abroad. second, it is also important to raise the core profitability of the existing borrowing firms through enhancing their governance. it has often been said in japan that corporate governance that raises a firm ’ s profitability has been weak. there are many views that, one way to overcome such weakness is to use equity funds, which have a strong tendency to search for yields, as leverage to strengthen corporate governance from outside. financial institutions can play a significant role in that regard by being involved in creating investment funds. moreover, the role of a financial institution as a lender is also not insignificant. many japanese financial institutions appear to have been relying too much on real estate collateral and personal guarantees when providing loans especially to medium and small firms, and governance after loan provision has not necessarily been sufficient