, macroprudential measures and, in some instances, even capital flow management measures5. these policies also come with their challenges and can have multilateral spillover effects on global economic and financial stability6. policy co - operation is thus an important complementary tool for capital flow management. multilateral co - operation can mitigate the cross - border effects of capital flows management measures and can provide economies with a useful framework for gradual capital flow liberalisation in line with their financial and institutional development. it is precisely in this way that the oecd code of liberalisation of capital movements makes its contribution. through the code, countries are provided guidance on the sequencing of liberalisation and the appropriateness of policy response to shocks. by fostering transparency, dialogue and accountability, adherence to the code ensures non - discriminatory treatment of countries, provides reassurance to markets as to the scope and duration of measures and catalyses policy support for reforms and adjustments. overall, the ever more interconnected international environment makes policy co - operation more necessary. to illustrate this point, i would like to draw on two examples : first, can coordination help moderate volatility in response to specific shocks, especially those emanating from global players? second, can it prevent the emergence of global imbalances? diverging monetary policies one pertinent example of the need for policy co - operation to avert large and volatile capital flows is in dealing with the effect of divergent monetary policies on global financial markets. it is broadly agreed that the impact of us monetary policy can have global repercussions, influencing exchange rates, risk premia and asset prices and causing valuation effects of us dollar - denominated liabilities. thus, changes of stance can be associated with significant capital flows especially to / from emerging market economies. the taper tantrum that affected global financial markets in 2013 is one example7. over the near future, it is widely expected that the us interest rate will be gradually raised, while those in the euro area and other advanced economies remain low. this divergence is likely to impact on global capital flows. uncertainty about the pace is judged to be a source of volatility in financial markets. thus, informal discussions between policy makers, if not closer co - operation, along with clear and coordinated communication and execution of policies, can be a useful tool for dampening volatility and preventing undue financial market turbulence. euro area imbalances my second example which supports the case

##judging risks. but when a shift in risk appreciation and pricing occurs, the reinsurance industry often separates the run off of old portfolios containing mispriced contracts from the establishment of new vehicles, capitalised separately to take advantage of attractive terms on new business. and for regular insurance, many contracts are annual, so adversely priced business can run off fairly quickly. banking typically works quite differently. banks around the world are carrying portfolios of term loans that are the legacy of the boom years. there is uncertainty – amongst banks ’ management, shareholders and funders – about the degree of fundamental impairment in those portfolios. new loans are booked to the same balance sheets. and so many banks face a choice between, on the one hand, conserving capital and liquidity to support legacy portfolios ; and, on the other hand, deploying capital and liquidity to write new business on what some see as the attractive terms and conditions now available. the banking system simply is not structured routinely to insulate new business from the legacy of past mistakes ; funding and capital are fungible. this predicament may be exacerbated by other features of the current environment. one is an apparent reluctance on the part of banks to raise fresh capital except where the market thinks that it is beyond doubt that they need to do so. given the feedback from credit conditions to asset prices and the real economy and so potentially to banks ’ future earnings, it might seem slightly odd for banks internationally to be maintaining distributions to shareholders but tightening credit availability in order to preserve resources. this has to be seen in the wider context. one possible explanation for banks holding back from raising fresh capital is that they may want to avoid giving an adverse signal about themselves. if there is a co - ordination problem, the regulatory authorities internationally should be able to tackle it, allied to ensuring prudent valuations of legacy portfolios. but another possible explanation is that, like some other market participants, bankers may believe that many legacy assets are fundamentally undervalued at present and that the markets for securitised assets will, with time, recover and reopen. on that view, banks are avoiding becoming overcapitalised on a fundamentals ( or forward looking ) basis, and so setting off another expansionary phase in the credit cycle, a little further down the road. the serious puzzle which that underlines is why there is a dearth of buyers for the supposedly undervalued paper.