risk based on one isolated factor could only provide a fragmentary view. what is called for is the “ triangular view of systemic risk ” – comprehensive analysis covering the interrelations or nexus between the banking system, financial markets and the real economy. it is against this background that i think we need to devote at least as much attention to market microstructure as to sophisticated analyses of “ fat tails ” in loss distribution. a focus on market microstructure could shed light on the relations between various risk factors. particularly important is to investigate how individual market participants under different budget and information constraints would behave rationally in stressful events, and how such behaviour would affect the formation of asset prices. strategic interactions recent episodes of financial crises seem to defy explanation on the basis of conventional economic theory, which regards macroeconomic phenomena as a mere aggregate of independent decisionmaking by economic agents. as a reflection of such limitations of conventional theory, there is a growing body of work attempting to interpret financial crises from the viewpoint of “ strategic interactions ” among market participants. i would like to devote a few minutes to outlining why. strategic interaction can be defined as a process in which each market participant explores his / her optimal strategy by conjecturing the response of other participants. some of the papers presented at this conference follow this path. herding behaviour is one example. as you know, a large number of small investors tend to follow a small number of large investors. once stressful events happen, such behaviour is likely to lead to one - sided market sentiment, which accelerates and propagates the stress within and across the markets. from the viewpoint of policymakers, herding behaviour as a phenomenon is hard to tackle. if we understand such a phenomenon as a consequence of strategic interactions among market participants, however, we might find a key to reducing the risk of triggering herding behaviour. according to my reading of this line of research, the outbreak of systemic disturbances would heavily depend on how many market participants, when faced with systemic threats, expect disturbances to actually occur. in other words, a crisis is not necessarily an accident, but a consequence of market participants ’ expectations. their expectations are formed from conjectural views of other market participants ’ responses to such threats. the magnitude of any crisis and the extent of contagion would critically depend on the feedback from market participants reacting collectively to systemic threats. feedbacks could also accelerate any crisis. these explanations seem to offer a useful perspective on the mechanism of

our wildest imagination. if there is the slightest chance of severe financial disturbances, the central bank must not lower its guard. in envisaging crisis management, the changing environment could compel us to rethink established doctrines. for example, there is no doubt about stressing that we need to minimise moral hazard. nevertheless, in the event that a systemic crisis is actually unfolding, we must not overlook the fact that there is an inherent, conflicting aspect in crisis management. in a sense, crisis management artificially creates moral hazard in order to avoid catastrophic consequences. in real - life policy responses, authorities inevitably face a trade - off between prevention of systemic crisis and minimisation of moral hazard. another example concerns the traditional lender of last resort functions of the central bank. according to traditional thinking, this is aimed only at banks. but the contemporary reality, as i noted earlier, is that systemic problems could originate in financial markets and such markets are populated not only by banks but also by a large number of non - bank financial institutions and conglomerates. this may argue in favour of the view that the traditional principle should be augmented. a related issue is the conditions under which central banks would take certain policy actions, such as invoking their lender of the last resort functions. traditionally, “ constructive ambiguity ” was regarded as the golden rule in such cases, but the bank of japan distanced itself from this in dealing with the crisis in the late 1990s, with a view to precluding speculations and enhancing policy transparency and accountability. the issue of the practical significance of “ constructive ambiguity ” must be explored vigorously without leaving any ambiguity. conclusions today, i have offered my views on systemic risk, which might have raised more questions than answers for central banks. in concluding my remarks, i would like to stress that central banks must continue to pursue these issues to discharge their responsibilities. the responsibilities arise from the following facts. first, central banks are unique economic agents having relations with each corner of the systemic risk triangle – the banking system, financial markets and the real economy. second, central banks are expected to confront almost every systemic crisis as entities that can readily provide liquidity. fortunately, central banks have made progress in gaining insights through extensive research on market dynamics. nevertheless, central banks must not be satisfied with what they have achieved so far. in order to answer the remaining questions, and refine views on established concepts, we are looking forward to continuously interacting with market participants, who have