klaas knot : high debt and financial stress - implications for asian financial stability speech ( online ) by mr klaas knot, president of the netherlands bank and chair of financial stability board, at the asean + 3 economic cooperation and financial stability forum, kanazawa, 5 december 2023. * * * thank you for inviting me to speak today. i am sorry that i cannot be there in person with you, as i was unable to travel from the cop28 proceedings, where i am today, to kanazawa in time. nevertheless, i am grateful to be able to share a few words with you on a theme that aligns so closely with the mandate of the fsb : safeguarding growth and stability in a complex world. a resilient and stable financial system is indispensable to sustaining economic growth, particularly in the current environment. this is at the core of the fsb's mandate. as the global financial stability watchdog, the fsb is responsible for assessing vulnerabilities affecting the global financial system. in addition, the fsb identifies and reviews the regulatory and supervisory actions needed to address these vulnerabilities. so how do we go about that? to start with, our surveillance framework aims to proactively identify vulnerabilities and provides a global, cross - border, and crosssectoral perspective on existing vulnerabilities. this framework draws on the collective perspective of the broader fsb membership. but that perspective can only take us so far in understanding and responding to global vulnerabilities. indeed, the global issues of today require coordinated responses, but this does not necessarily mean one size fits all. regional perspectives matter. to gain a truly global perspective, it is important for us to incorporate the experience and intelligence of emerging market economies ( emes ) and also look beyond our g20 membership. our regional consultative groups are one way we do this. they provide us with a richer and more detailed regional perspective. one which we appreciate ever more during times like the present when financial and macroeconomic uncertainty are elevated. last week our regional consultative group for asia met in hong kong. members discussed global and regional financial market developments and their impact on asian economies. a key theme was rising government indebtedness and financial stability risks linked to the sovereign - bank nexus. i note that amro's financial stability report raises many of the themes discussed by our regional group, including elevated private and public nonfinancial

shocks. banks became mired in painful but necessary balance sheet repair efforts. as a result, they have been restrained in supporting economic recovery. banks ’ crucial role in the financial intermediation of the euro area explains why many monetary policy interventions during the crisis were aimed at repairing the bank lending channel. the ecb was confronted with a systemic liquidity squeeze, and had to accommodate the funding needs of the banking sector. as such, we averted a self - fulfilling solvency crisis and resulting monetary contraction. nevertheless, many euro area banks lost their willingness and ability to keep pumping credit into the real economy. this required further flexibility in our policy framework, such as targeted long - term refinancing operations and a negative interest policy. partly as a result of these extraordinary measures, the monetary transmission is working more smoothly. lending rates have eased, and the credit supply has picked up. to sum up, the crisis illustrates the importance of quickly restoring the banking system, both for the real economy and the effectiveness of monetary transmission. it has also exposed the limits and downsides of monetary instruments. central banks can provide liquidity support but cannot restore the solvency of banks. excessive reliance on central banks in fact delays the necessary adjustments. cheap funding may prop up non - viable banks for too long, while making them less and less resolvable. the significance of resolution for the monetary and banking unions is without question. in the euro area there are clear further constraints to resolving banking problems. unlike the us, there is no single fiscal policy that can dampen shocks across member states. and unlike the us, we do not yet have a single deposit insurance system that can provide confidence to all depositors, even if an idiosyncratic shock hits a particular member state. also, capital markets as alternative to bank intermediation are relatively underdeveloped compared to the us. hence, to ensure the stability and sustainability of the euro area, making banks resolvable is essential. as this session is about the road ahead for resolution, let me raise two specific issues for discussion. the first one concerns pressure on regulators to soften rules designed following the financial crisis. it is often said that financial regulation moves like a pendulum, swinging back and forth between opposite states. when a crisis occurs, there is a call for tighter rules, and the pendulum swings. over time, as memory fades, there is a push for deregulation and fewer rules. thus the pendulum swings back, possibly so