other one is the macro prudential perspective. they are mutually reinforcing and both are essential for ensuring financial stability. an important movement in the last decade has been a much more explicit emphasis being given to the macro prudential aspects of banking supervision by central banks as well as academics and other market observers. what do we mean by macro prudential aspects? i think it has the following four features : • first, its aims to limit the distress to entire financial systems rather than distress to individual institutions. • second, its chief aim is to avoid large and burdensome costs to the economy – such as expensive bank bailouts – rather than aiming to protect more narrowly the depositors of an individual bank. • third, it is based largely on the assumption that at least some of the risks faced by the banking system collectively differ from those faced by individual banks. in other words, the risk to the system is not simply the sum of risks to individual banks. • and, fourth, it aims to examine risks that arise from the interaction of banks as part of a financial system rather than on a bank - by - bank basis. while having sound and sturdy building blocks of the system is essential, it is also essential to understand how they all fit together in a framework and this is where the macro prudential perspective becomes critical. in short, the difference between the two pillars of micro and macro prudential surveillance is between a system - wide health check and ensuring that individual banks are inoculated properly from disease. the macro prudential pillar takes account of those risks that may affect all, part, or most banks in the system - and not just individual banks. like most other bank supervisors i ’ ve spent most of my career looking at banking system soundness mainly from an individual bank perspective. however, as a career central banker, i also have had to spend a good deal of time looking at financial stability from the macro prudential perspective as well. for much of my career we didn ’ t call it macro surveillance but it was very much in our minds when, for example, in the late 1980 ’ s the u. s. banking system suffered from the collapse of a number of sectors of the economy episodically resulting in a very unhealthy and unstable banking system as a whole. over 1, 500 banks failed and public confidence in the industry was understandably threatened. in fact, on two occasions during that period the system was so close to collapse

4. all these complications are making life difficult for policy makers in the region. while asia, having learned well the lessons from the asian financial crisis, has managed to get through the recent global crisis relatively unscathed, we are now entering uncharted waters, and there are both imminent and longer - term policy challenges. 5. first and foremost, it is challenging to manage the large capital flows. the divergence in the growth rates of advanced and emerging economies have been driving fund flows to asia, resulting in signs of overheating in certain pockets of the region. the increasingly negative real interest rates as a result of rising inflation in many regional economies will add fuel to the already high credit growth and heated asset markets. that said, we must also be wary of the risk of reversal of the fund flow. the recent surge in headline inflation and the more favourable near - term cyclical conditions in advanced economies have already brought forward expectations of the start of rising interest rate cycles. with the normalisation of monetary policy stances in the advanced economies becoming more imminent, the risk of an abrupt reversal of international capital flows is increasing. this calls for pre - emptive policy actions to contain the build - up of overheating pressure and another boom - bust cycle in the region before such abrupt reversals of capital flows occur. bis central bankers ’ speeches 6. secondly, some of the conventional wisdoms in monetary policy may be challenged by paradigm shifts in the next phase of growth. conventionally it has been suggested that central bank normally may not need to react proactively to commodity price inflation because of their transitory nature and limited pass - through to core inflation. however, the recent increase of commodities prices such as food and oil could be more sustainable because of structural change in demand and supply. for instance, structural factors such as slowing of crop yield growth, fast population growth and higher income elasticity for food in developing countries would continue to support higher food prices. policy markers would therefore need to pay attention to these developments in calibrating the appropriate degree of monetary tightening. 7. thirdly, there is also a need to diversify the sources of growth for the region, in order to generate sustainable growth and redress global imbalance. in this regard, it is worthnoting some encouraging developments that are underway in the region. the first one is the deepening intraregional trade and increasing orientation towards domestic consumption. the robust economic growth of the regional economies over the past year has mainly