serbia. the second pillar of defence against the crisis may be a countercyclical fiscal policy, that is, the stimulation of domestic demand during the time of recession. however, the scope for implementing countercyclical fiscal policy is usually smaller in developing countries. it narrows down even further with the swelling of fiscal deficits in times of crisis, sounding alarms on public debt sustainability in many countries. that is why experts recommend fiscal consolidation instead of fiscal expansion. true, in the short run, fiscal consolidation negatively impacts gdp, but in the medium and long run it lays groundwork for sound and sustainable economic growth, which strengthens investor confidence and pushes down the country risk premium. when there is not much room for countercyclical fiscal policy, it is expected that monetary policy should provide a boost to economic activity. however, its countercyclical potentials depend on the nature and strength of inflationary pressures. as opposed to the demand - side shocks, the supply - side shocks, such as the current food price shock in serbia, are usually not addressed by monetary policy because these are temporary shocks with relatively shortlived effects. however, if they trigger an increase in inflation expectations and other prices and jeopardise price stability despite the strong disinflationary effect of aggregate demand, bis central bankers ’ speeches monetary policy tightening is inevitable. in other words, such circumstances considerably narrow down the scope for boosting economic activity through monetary policy. the efficiency of monetary policy in serbia is most constrained by the high degree of euroisation of the domestic economy, which makes the foreign exchange risk the key risk to financial stability. note that while banks are not exposed directly to the foreign exchange risk since the currency structure of their assets and liabilities is matched, it is the borrowers who take the major brunt of this exposure. and the exposure of the government, corporates and households to sudden and significant changes in the exchange rate may have serious implications for financial stability through the conversion of foreign exchange risk into credit risk. as confirmed by the stress tests implemented by the national bank of serbia, the stability of our financial system is not under threat despite the high share of non - performing loans ( npls ). in september, serbia ’ s npl ratio reached 19. 9 % and was the highest in the region. however, it was in serbia too that the npl ratio recorded the smallest increase since the beginning of the crisis. satisfactory stability of our banking system is also confirmed by the

welfare. this is true whether the financial system is largely composed of domestic banks or dominated by foreign banks. and it is critical in a small, open, indebted, economy, such as new zealand ’ s, given the potential vulnerability to international sentiment and cross - border capital flows. in the absence of any fair and formalised, operationally and legally robust, trans - national regulatory framework, the financial stability buck stops at national laws and the supervisor ’ s and central bank ’ s duties under those laws. the financial stability stakes are too high to pass on such a responsibility lightly. in banking, while the home and host authorities have some complementary interests, they also have areas of potentially diverging and conflicting interests, as well as jurisdictional limits. the reserve bank of new zealand is committed to doing all it can to maintain a sound and efficient financial system in new zealand. we believe that it is essential to maintain the frameworks needed to fulfil our responsibilities. this includes a clear legal and practical basis to supervise the financial system and the capacity to respond to a financial crisis effectively on a stand - alone basis if necessary. equally, we must have a clear legal basis for providing liquidity support when required, on the basis of bank balance sheets and capital positions that are as meaningful and clear as they can be in the circumstances. but, we also recognise the benefits of mutual recognition and harmonisation of regulatory policies where sensible, and the benefits of cooperation and coordination between the home and host supervisory authorities. the efficiency and effectiveness of our banking supervision will be greater, and the crisis management options wider, the closer the home and host authorities are. the reserve bank of new zealand is committed to remaining a welcoming, albeit responsible, host. however, the regulatory risks and rewards have never been greater.