supervision perspective. this renewed emphasis has several different sources. one of them was undoubtedly the financial crises that hit asia in 1997. this experience showed that even if the individual banks in a financial system appear to be sound, the system itself can still be overwhelmed by financial shocks. for example, the system can be exposed to a common risk that isn ’ t obvious from looking at each bank individually. in the asian crisis countries the exposures of banks to foreign exchange risks didn ’ t show up on bank balance sheets. the risks were instead in the balance sheets of their major borrowers, who had borrowed heavily in foreign currencies even though they had domestic currency cash - flows. and this also points to another feature of macro prudential concern – it cannot stop at the traditional boundary of the banking system, but must look at the risks in the nonbank financial sector and at the structure of household and corporate balance sheets. there are also two other factors worth mentioning. the first is that central banks have become increasingly aware that monetary stability and financial stability are closely linked. it used to be said that the reason why central banks were concerned about banking system soundness was that the banks were the main transmission mechanism for monetary policy. this still remains largely true, but central bankers have come to recognise that other aspects of financial stability also matter from the point of view of being able to meet monetary policy goals. for example, as the bond market has become an increasingly important as a transmission mechanism for monetary policy, market conditions, the soundness of intermediaries, and the transparency and integrity of pricing have all become relevant issues for the central bank to consider. the debate that took place a few years back on whether central banks should also target asset price inflation as well as consumer price inflation is another example. a third factor has been the changing responsibilities of central banks. the recent emphasis given to macro prudential policy has coincided with the move, in some countries, to establish regulatory agencies separate from the central bank. the statutory responsibility for ensuring bank soundness has moved to these agencies, but the central bank has kept its traditional concern for the overall soundness of the financial system. this has led to a clearer distinction between the micro - and macroperspectives that had become blurred in the second half of the last century. in britain the creation of the financial services authority led the bank of england to build up its resources in financial stability analysis. this was a result of the bank ’ s efforts to ensure that

william a ryback : macro prudential policy – a new name for some old ways of thinking? speech by mr william a ryback, deputy chief executive of the hong kong monetary authority, at the macro prudential supervision conference : challenges for financial supervisors, organised by the korea financial supervisory commission / financial supervisory service and the international monetary fund, seoul, 7 november 2006. * * * ladies and gentlemen, i am pleased to be here today to add my thoughts to this important discussion on emerging insights into the macro prudential end of the supervision business. i also am pleased to be back in seoul one of the most dynamic cities in asia and to be hosted by my friends in the korean bank supervisory community - many of whom i have known for a number of years. it is almost ten years from the financial crises that affected many parts of asia. this conference then is being held at an opportune time to allow us to reflect on the lessons learned. there has been considerable change over the last decade. risk management in the regions banking systems ’ have become more robust. there has also been a step - change in the standards of supervision. risk - based supervision has replaced compliance checking. there are also now moves under way to improve regional cooperation on issues like basel ii implementation, in which emeap will continue to play a leading role. clearly, no financial system can be considered stable unless the individual institutions that comprise its whole are themselves healthy. thus risk - based supervision and proper risk assessment by banks are essential measures to bring about financial stability. in this regard basel ii will no doubt help strengthen our collective financial systems by encouraging banks to adopt stronger risk management mechanisms. pillar 2 of basel ii will add to the stability of the financial system by providing a deeper and richer mechanism to evaluate a broader range of risks - including risks that will impact on the system more broadly - such as credit concentration risk. encouraging greater transparency by banks under pillar 3 also contributes to making financial systems more resilient by providing a consistent framework across national boundaries for analysts to do their job in identifying weak or risky banks. ensuring the soundness of individual banks – what some people now call the " micro prudential " perspective – is, however, only part of ensuring a sound financial system. bank supervisors these days now talk about " pillars " and in addition to the three pillars of basel ii i believe that there are also two pillars of financial stability. one of these is the micro prudential perspective. the