choongsoo kim : central banks and financial stability – lessons and challenges from the crisis opening address by mr choongsoo kim, governor of the bank of korea, at the 18th central banking seminar, seoul, 23 november 2010. * * * opening remarks ladies and gentlemen, let me extend a hearty welcome to all central bankers from around the world taking part in the bank of korea ’ s “ central banking seminar ”. i would also like to thank dr. dosoung choi of the bank ’ s monetary policy committee for being here to deliver the keynote address shortly. this seminar, now in its 18th year, has contributed greatly to the sharing of diverse experiences and ideas among central banks in various countries. it has also provided an opportunity for broadening the networks linking the staff of central banks. since the outbreak of the global financial crisis, countries around the world, with the g20 to the fore, have been preparing frameworks that can underpin sustainable and balanced growth. in this context, the role of central banks, in securing financial stability needs to be heightened further to prevent any recurrence of the crisis. the theme of this seminar, “ central banks and financial stability : lessons and challenges from the crisis ”, is accordingly one that deserves our particular attention. central bank tasks after the global financial crisis the recent crisis is regarded as the severest since the great depression of the 1930s. the crisis has shown us how massive are the imbalances accumulated in the global economy during the period called as the time of “ great moderation ”, and how vulnerable it is to systemic risk. we have also come to realize that the development of financial engineering, once believed to disperse risks, has in fact worked to weaken economic agents ’ vigilance toward them. the g20, along with international financial institutions including the imf, the fsb and the bcbs, have devoted much effort to tackling these problems. for their part central banks, in conducting monetary policy, need to consider these problems so as to prevent crises. first of all, we should seek to find the desirable role of the central bank within a macroprudential policy framework that ensures overall economic and financial stability. the crisis has taught us that, even under low and stable inflation, financial sector imbalances can accumulate through a rapid expansion of credit and sharp run - ups in asset prices, and that these can trigger crises. it is also never simple for us, as the lender of last resort

. in a cross section dimension, macroprudential tools aim to reduce contagion risks by improving resilience of systemic institutions for example, via additional capital surcharge and loss absorbency requirements. other prudential tools in the cross section dimension include increasing risk weights and large exposure limits. 19. overtime, bank indonesia has implemented a broad range of macroprudential instruments including capital - related tools as required by basel iii such as counter cyclical capital buffer as well as asset - side tools and liquidity - related tools. asset - side tools include certain loan restrictions, such as ltv caps and to boost credit have put in place incentives and disincentives in the form of reserve requirements linked to loan to funding ratios. to strengthen corporates resilience to exchange rate shocks, bank indonesia also introduced requirements for hedging ratio and forex liquidity ratio. macroprudential policy interaction with others policies 20. in the areas where macroprudential policy interacts with microprudential policy, bank indonesia and ojk work hand in hand in formulating the optimum policies. for instance, bank indonesia has contributed work and research to the formulation of lcr requirements with ojk and in the identification of systemically important bank as mandated by the law on financial system crisis prevention and resolution. bank indonesia and ojk have also established a bilateral coordination framework to facilitate and to optimize cooperation and coordination in carrying out the function, duties, and authorities of bank indonesia and ojk. 21. recognising the potential interaction of macroprudential policy with other policies that also have a bearing on systemic risk, requires strengthening of inter - agency coordination. such interaction between macroprudential policy not only applies with microprudential policy but also with monetary and fiscal policies. as mentioned by the imf in their recent stock taking paper, bis central bankers ’ speeches boundaries and interactions between policies are complex and can give raise to both complementarities and tensions that may need to be resolved. for example, via suitable institutional arrangements which we effectively already have in place. closing remarks 22. to conclude, it is my greatest hope that this book can serve as a gateway for the public to better understand macroprudential terms and concepts as well as its main objective in mitigating systemic risk. with better understanding of the systemic risk transmission, we as individuals can help contribute in preserving financial system stability by limiting exuberance risk taking behaviour. hopefully