main distinction is the fact that macro - prudential instruments are activated as a function of the cycle or structural characteristics of the system as a whole, and not according to the specific risk profile of a given institution. over the recent years extensive work has been undertaken [ by macro - prudential authorities, the esrb, and the academia ] to operationalise the instruments for the implementation of macro - prudential policy. this includes : identifying a set of indicators or risk parameters to trigger the activation of the instrument ; analysing their transmission mechanism and impact in order to allow a more precise calibration and ; identifying possible loopholes or unintended effects that could undermine their efficacy. many of today ’ s presentations covered these topics and i am very grateful to carsten detken, javier suarez, gabriel galati, deniz igan, caterina mendicino and ola melander for sharing with us the conclusions of their work. if there is an area of research with great value for policy - making theirs is definitely one. despite this progress, the task is far from concluded. the limitations in systemic risk measurement also condition the implementation of macro - prudential policy, namely concerning the estimation of the parameters of an equation linking the activation of the instruments to a systemic risk measure. this is particularly relevant for time - varying instruments, such as the countercyclical capital buffer, which rely in the timely identification of the phase of the credit cycle. in addition, the still limited experience with macro - prudential instruments confers a significant degree of uncertainty to their impact. furthermore, policy - making needs to take into account that the transmission mechanism of policy instruments may not be static, but evolving with innovation and the structure of the financial system, and that the impact of policy measures can be undermined by unintended effects. these can emerge from the interaction and substitutability between the regulated and non - regulated sector ( i. e. shadow banking ) and from the resulting possibility of regulatory arbitrage. in addition to the more traditional macro - prudential instruments, there are other tools – perhaps, more appropriately categorized in a middle - ground between risk analysis and policy tools – that can also be very useful for macro - prudential purposes. stress tests and funding and capital plans can be helpful with decisions concerning the activation and calibration of both micro and macro - prudential policies, to the extent that they help to identify potential vuln

seong - tae lee : increasing capital flows among countries and monetary policy effectiveness opening address by mr seong - tae lee, governor and chairman of the bank of korea, at the 15th central banking seminar, seoul, 18 september 2007. * * * opening remarks ladies and gentlemen, let me extend a warm welcome to all of you, central bankers gathered from around the world to attend the bank of korea's " central banking seminar ". i would especially like to express my deep gratitude to our keynote speaker dr. mark spiegel, vice president and director in the federal reserve bank of san francisco. this seminar, now in its 15th year, is held to allow the sharing of diverse experiences and ideas relevant to major monetary policy issues. at the same time, we hope it serves to broaden relationships among central bankers. the theme of this year's seminar, " increasing capital flows among countries and monetary policy ", is likely to be of great interest to us all. it is very closely related to the recent international financial market environment, in which price variables are showing heightened volatility triggered by the turmoil in the us sub - prime mortgage market. the impact of the increase in cross - border capital flows cross - border capital flows have increased very rapidly this decade, bolstered by the development of information and communication technology, the progress of financial innovation, and the integration of the global economy. the scale of cross - border capital transactions, including those in bonds and shares and direct investment, increased almost threefold between 2002 and 2005, from about 2 trillion us dollars to some 6 trillion us dollars. this expansion of international capital transactions has brought us a number of beneficial effects. first of all, it has acted to heighten the vitality of the global economy by allowing investors to disperse investment risk and borrowers to reduce their costs of capital. it has also helped bring about an upgrading of the financial markets of emerging market countries as well as developed countries, in conformity with global standards. the meltdown of the us sub - prime mortgage market is of course having a great impact on international financial markets. however, in contrast to the case during the asian currency crisis of the late 1990s, there are now no nations experiencing severe difficulties. this is one example of how the financial systems of almost all countries have been further strengthened. on the other hand, we must not be blind to the negative aspects of these expanding capital flows. the economies of countries around the world have become closely interlinked