risks. for this purpose, we have identified eight different types of risk : credit, market, interest rate, liquidity, operational, legal, reputation and strategic. environmental risk straddles a number of these risks. in particular, it is a subset of credit, legal and reputation risk : • credit risk can arise indirectly where banks are lending to customers whose businesses are adversely affected by the costs of cleaning up pollution or by changes in environmental regulations. for example, the costs of meeting new requirements on emission levels may be sufficient to put some companies out of business. banks may also find themselves directly affected if they find that the value of property that they have taken as collateral is impaired by contamination. • legal risk can take a number of different forms. most obviously, banks like other companies are at risk if they themselves do not comply with relevant environmental legislation. but more specifically, they are at risk of direct lender liability for clean - up costs or claims for damages if they have actually taken possession of contaminated or pollution - causing property as a result of realising security. there is also the even more worrying prospect that in some jurisdictions the mere act of lending to a company or project which causes environmental problems may lead to the lender incurring some liability for clean - up costs. banks may protest, with some justification, that they should not be forced into the role of “ environmental police ”, but this may carry little weight in some courts. • reputation risk may arise even in the absence of lender liability, particularly if banks are seen as associated with large - scale projects that are viewed as socially or environmentally damaging, such as dam projects. the growth of globalised protest movements and the use of the internet to disseminate information have greatly increased the risk that individual companies will be the subject of concerted campaigns of public criticism. these are the risks, but it would also be wrong to ignore the opportunities that environmental protection can provide for banks and other financial institutions. most obviously, the costs of cleaning up pollution and the need to invest in environmentally friendly technology imply the need for finance, either from the banks or the capital markets. just to take one small example in the hong kong context, the government ’ s initiative to persuade diesel taxi owners to switch to lpg taxis creates the chance for the banks to finance the purchase of the new vehicles. banks also need to bear in mind that while there will be losers from the drive to cut pollution, there will also be winners in the shape of

of a given stance of monetary policy against the objectives of the federal reserve. while the evolution toward more efficient and globally integrated financial markets is surely a positive for long - run economic growth both here and abroad, it also challenges policymakers to constantly update and question our understanding of the behavior of financial market indicators and the signals that these indicators can provide in the policymaking process. and as financial markets continue to broaden and deepen, the behavior of asset prices will play an important role in the formulation of monetary policy going forward, perhaps a more important role than in the past. what might this mean for the fed and for other central banks in practice? there is a well established, and i believe fundamentally correct, case against directing monetary policy at specific objectives for asset values or the future path of those values. in other words, asset values should be neither a target nor a goal of monetary policy. the rate of increase in asset values alone seems to tell us very little about underlying and future inflation. because we know so little about how to assess the appropriateness of asset values against fundamentals, because we have so little capacity to both forecast and predictably affect the future path of asset prices, and because we know relatively little about how changes in wealth affect the real economy and inflation, we cannot use monetary policy responsibly or effectively to achieve specific objectives for asset values. monetary policy does not today and is unlikely in the future to offer us an effective tool for directly reducing the incidence of large or sustained deviations of asset values from what might turn out to be their fundamental values, what some call bubbles. that said, monetary policy still has to take into account the impact of significant movements in asset values on output and inflation. financial asset prices, by their nature, allocate resources between the present and the future and thereby affect consumption, investment and future growth. history provides us with numerous examples in which significant movements in asset prices have had sizable effects on the path of output relative to potential and on price stability. and experience suggests that asset values can be very sensitive to movements in monetary policy or to the perceptions of future policy moves. the challenge for central banks is to determine how movements in asset values and expected asset values affect the evolution of the economy. there is little to suggest that the task has gotten easier with the increasing complexity of financial markets, and it has more likely gotten harder. the incorporation of asset price movements into monetary policy formation is hard to do, in part, because we don