an asymmetrically quick manner, since banks are forced to take immediate action to counter the shortage in funding liquidity. in addition, once confidence is lost, it takes a long time to restore the eroded confidence. as market participants explain, the credit line can be cut off at once, but the reestablishment of the credit line takes a much longer time. issues related to monetary policy mop - up operations given the understanding on the risk - taking channel i have discussed so far, what consequences will follow from the asymmetric monetary policy responses before and after the burst of a bubble? suppose a central bank is considered to make a commitment to refrain from taking any monetary policy responses until the burst of a bubble, the private agents will surely take action based on such unfounded expectations. that will accelerate maturity mismatches and asset price increases, thus further accelerating the bubble and the adverse consequences of its burst. one of the basic messages from standard new keynesian macroeconomics is that “ the policy commitment is effective in stabilizing the economy, given the forward - looking behavior in the private sector. ” standard new keynesian macroeconomics does not incorporate the risk - taking channel, but its basic message suggests the importance of the symmetric monetary policy responses to a bubble. extra operations then, what is an idea about extra operations against a bubble? i agree with the principle that monetary policy should respond to asset price movements, whether driven by the fundamentals or not, only to the degree that those movements have implications for future inflation and economic growth. i should also say that the real issue here is how to understand the expression of “ only to the degree that asset price movements have implications for future inflation and economic growth ” in implementing monetary policy. the transmission dynamics of the risk - taking channel, i have just mentioned, differs significantly from those of the standard interest rate channel through housing investment and capital investment. the risk - taking channel produces asymmetric effects between the initial positive impact and the later negative impact. and, more importantly, it also accompanies considerable uncertainty about the timing when negative impacts occur. given such nature of the risk - taking channel, conventional macroeconomic models in a central bank ’ s toolkit do not sufficiently incorporate the effects stemming from maturity mismatches and asset prices in the short term as well as in the longer term. policy challenges for central banks in light of the previous discussion, i will raise some issues for discussion regarding the actions by central banks.

masaaki shirakawa : some thoughts on incentives at micro - and macrolevel for crisis prevention remarks by mr masaaki shirakawa, governor of the bank of japan, at the eighth bank for international settlements, annual conference, basel, 26 june 2009. * * * introduction the current financial and economic crisis has posed wide - ranging challenges to policymakers and academics. already, various proposals have been made for the reform of financial supervision and regulation. the traditional approach in this area is based on a microprudential perspective. from that perspective, financial system stability will be achieved by assembling sound financial institutions with adequate capital and liquidity positions as well as proper risk management. that approach certainly plays an important role, but i am still uncertain whether the cumulative efforts in that approach will eventually ensure the financial system being shielded from a future crisis. in fact, the financial regulatory and supervisory framework was reformulated from the microprudential viewpoints every time a financial crisis occurred. in that respect, i will raise two questions. the first question is : “ has legally effective netting contributed to reducing the overall degree of risk in the financial system? ” it is true that netting is effective in reducing counterparty risk. however, once the risk is reduced to a certain degree, a financial institution tends to take further risk. as a result, it is still not certain whether netting contributes to reducing aggregate risk. the second question is : “ will a financial institution take a different business strategy not to expand its leverage when facing again a benign economic condition, comprised of low inflation, high growth, and low interest rates? ” some financial institutions will surely take a conservative strategy, considering the lessons from the current crisis. but, most financial institutions will find it hard to resist pressures from equity holders to raise the returns on equity under severe competition. those examples seem to show the need for analyzing the incentives of financial institutions from the viewpoints of the macro - as well as micro - level. incentives for a financial institution are underpinned not only by the framework for financial regulation and supervision at a micro level but also importantly by the financial and economic environment at a macro level. at a micro level, “ too big to fail ” is the single most important issue. at a macro level, monetary policy is important. today, i will mainly focus on monetary policy responses to a bubble. then, i will briefly touch upon some issues on supervision and regulation. importance of risk - taking channel before the