importance of the capital monitoring exercises, conducted by various international fora, including the basel committee, should be highlighted. these exercises are seeking to analyse the developments of the minimum capital requirements under the basel ii framework with the aim of assessing the level and cyclicality of capital requirements. this is the basis for exploring their possible impacts on banks ’ behaviour and the business cycle. since the complete elimination of cyclical variations in banks ’ lending activity would be an unrealistic goal, regulators should instead focus on reducing the occurrence and severity of systemic crises. to this end, the regulatory framework should be revised so as to restrain the build - up of excessive risks during the expansion phase and to dampen the costs of financial distress in the contraction phase. a major challenge for authorities, however, is the proper definition of a regulatory framework that would allow banks ’ capital buffers to shrink in downturns ( i. e. to absorb losses ), without creating moral hazard and regulatory arbitrage. i thank you for your attention.

cat and not, by itself, of such enormous importance to justify devoting monetary policy solely to its control. just about the whole of the world ( whether inflation targeters or not ) has reduced inflation to manageable levels. it seems at least possible that people will begin to regard this task as so easy, and so assured of success, that monetary policy could be asked to do more. i can think of two directions in which we might be asked to do more. first, we have established a wide consensus that monetary policy can do something to smooth the course of the business cycle, but this should not be the primary goal. but if inflation control begins to look easy, people may ask central banks to focus the power of monetary policy more fully in the direction of smoothing the cycle. i do not propose to say more about this, other than to observe that this can, at least in principle, be encompassed within the inflation targeting framework, recognising the legitimate trade - off between inflation variability and output variability. but we also need to remember how much more painful it is to have to wind inflation back down, once price expectations have been disturbed. more interesting, in the current debate, is whether monetary policy should do more to achieve financial stability. a clear dichotomy or specialisation has developed, in which monetary policy is seen as the instrument for maintaining price stability, and prudential regulation is ” assigned to ” financial stability. this dichotomy is increasingly reflected in the vogue of separating the central bank from the prudential regulator. but financial stability is under constant bombardment – reflected in the increasing complexity of the basel ii rules ; the pressure to widen the reach of financial regulation ; the increasing recognition that financial stability problems are coming not just from institutions, but from markets and their evolution ; and the difficulty of staying ahead of the evolution of ever - more - complex financial instruments and products ( driven by competition and sometimes by the objective of getting around prudential regulations ). the ltcm experience is a reminder of how the leading - edge players will be constantly pushing beyond the regulators ’ capacity to understand, let alone react effectively. on top of this we see the evolution of markets, often driven by the desire to minimise risk to individuals, taking actions which may make the overall system more vulnerable – the examples here are the various forms of “ inflation targets and inflation targeting “, remarks by governor laurence h meyer at the university of california at san diego economics roundtable, san