foreign exchange swap market, which made it difficult to obtain funds in foreign currency, regardless of individual financial institution ’ s creditworthiness. smooth liquiditiy management by a financial institution cannot be achieved only by using its own cash, deposits, and borrowing capability. it also depends on the condition of market liquidity of financial assets. however, if a financial institution tries to secure its liquidity level sufficient enough to cope with an extreme stress situation, the financial institution has to hold sizable amount of risk free and short - term financial assets and thus cannot pursue its intrinsic function of financial intermediation. in that context, liquidity management by a financial institution itself, market - level efforts to maintain market liquidity, and proper exercise of the lender of last resort function by a central bank, would be the three indispensable factors. with respect to liquidity management by a financial institution itself, the basel committee on banking supervision released a guidance paper on liquidity management last september, and there it presented sound practices for enhancing liquidity management by conducting appropriate liquidity management, including that of foreign currencies, according to the characteristics of each market in which financial institutions operate. importance of improving market infrastructure the third lesson is the importance of improving the infrastructure of the market and the payment and settlement system, which is derived from the aforementioned perspective of maintaining market liquidity. the sudden collapse of lehman brothers brought a state of turmoil into the japanese financial markets. in particular, the number of settlement failures increased in the jgb repo market, which contributed to declining liquidity in the jgb market. however, without the efforts in recent years by the market participants and the central banks to improve the infrastructure of the market and the payment and settlement system including the establishment of clearing mechanism in the securities market such as the japan government bond clearing corporation ( jgbcc ), default in the repo market might have had a contagion effect on the entire jgb market and the market turmoil could have been much more severe. a good example is the scheme for foreign exchange settlement, which is called “ cls, ” or continuous linked settlement. the cls links the payment systems of countries and makes a simultaneous payment of a pair of currencies associated with foreign exchange trading, which reduces foreign exchange settlement risk. while it is hard to win understanding in normal times, the experience since the collapse of lehman brothers suggests the importance of a scheme to properly manage counterparty risk. given the current situation, its

optimal way and utilizing the fruits of technological innovation. the function of financial intermediation supports that process from the financial side. given this line of thinking, it is important to steadily understand how funds are used for what purposes and, in doing so, whether financial institutions are conducting proper liquidity management. the bank of japan conducts both on - site examination and off - site monitoring, and for the central bank as a lender of last resort, the current crisis obviously showed the importance that the central bank has hands - on knowledge. in that regard, close liquidity monitoring by the bank has been effective in maintaining the relative stability of japan ’ s financial markets. in the case of international banks, the bank ’ s on - site examination and off - site monitoring are conducted for their japanese branches. however, to find out the potential risk factors and to properly evaluate their impact, the bank needs to deepen the understanding of the financial groups ’ entire management policy and risk management strategy, the status of the bases in japan within the group, and the governance structure. for those who are here today, i would like to seek your understanding and cooperation, more than ever, on the importance of the bank ’ s on - site and off - site monitoring. international cooperation third is the importance of international cooperation. major central banks have been closely exchanging views and information not only at governor levels but also at staff levels with respects to various areas such as market operation, financial supervision, and settlement system. such cooperation has become greater in the current crisis. the close cooperation is not only with the united states and europe, but also with asian countries. as expressed in the word “ globalization, ” it is true that financial markets are heading toward standardized and seamless ones. at the same time, it is also another fact that plenty of seam and lumpy factors remain. for that reason, the importance of information exchange and cooperation in the area of central banking business would be increasing further. the bank of japan would like to communicate closely with you, conduct appropriate policy responses, and actively support market participants ’ efforts toward financial system stability. your cooperation is highly appreciated. thank you very much.