one issue that has been identified is the procyclicality caused by the decrease in credit risk during an economic boom and the increase in credit risk during a recession, but profits and losses related to financial market transactions show a similar procyclical tendency. when benign financial and economic conditions continue for a certain period, the market risk being estimated by using data obtained during that period is likely to underestimate the actual size of the risk. as a result, during an economic boom, financial institutions lend aggressively as their capital bases increase due to high profits, leading to further increases in lending through, for example, a further rise in asset prices. similarly, the reverse occurs during a recession. discussions are therefore underway on how to mitigate such procyclicality, with ideas including the lengthening of the period assets are included in risk accounting to avoid excessive fluctuation in risk - weighted assets and whether to introduce a framework for countercyclical capital buffers. the underlying idea of such a framework is to implement capital adequacy rules in a countercyclical manner by requiring financial institutions to build up capital when economic conditions are favorable, which could then be drawn down when economic conditions deteriorate. i believe that proposals to use capital adequacy regulations to mitigate procyclicality and reinforce capital bases go in the right direction and are likely to contribute to financial system stability. however, from a macroeconomic perspective, it must be avoided that the strengthening of regulations impairs economic stability. for this reason, it is important to secure flexibility, for example, in the procedure and timing of the implementation of new capital adequacy rules by taking financial and economic conditions in countries around the world into account. in this regard, as also articulated in the consultative proposals for the review of rules recently released by the basel committee, the new rules should be implemented once financial conditions have improved and economic recovery is ensured. the accounting system the accounting system is also an element affecting the behavior of financial institutions in addition to monetary policy and financial regulation and supervision. the accounting system directly affects the assessment and profitability of assets held by financial institutions. for instance, from autumn 2008, as the functioning of markets declined, prices of securitized products fell all at once, leading to concerns about capital shortages at financial institutions. this further paralyzed market functioning and intensified the downward spiral. this course of events illustrated once more that the method of assessing financial products and the accounting system

dynamic changes in risks, focusing on how risks inherent in the financial system change over time. in the run - up to a crisis, as seen in the period prior to the recent crisis, benign economic conditions continue for some time, economic actors become too optimistic in their risk assessment, and their risk tolerance increases. as a result, as economic actors ’ risk - taking stance becomes more aggressive, asset prices rise and leverage increases, leading to even more aggressive risk - taking stances. our understanding of such endogenous changes in the risk - taking stance, that is, the risk - taking channel, is extremely limited. what is clear, however, is that such changes are greatly influenced by the economic and financial environment, as i mentioned earlier. financial imbalances that accumulate in the process of risk - taking cannot be sustained indefinitely and eventually balance sheet adjustments will take place. such adjustments proceed gradually in the beginning. however, triggered by some kind of a shock, a crisis will emerge in the form of funding liquidity shortages and become more severe as confidence among market participants in each other collapses. this phenomenon that the profit - seeking behavior of financial institutions amplifies the financial and economic cycle is referred to as “ procyclicality ” and is another important dimension of assessment apart from the aforementioned cross - sectional network perspective. iii. approaches taking account of macroprudence with the importance of macroprudence having been recognized, what sort of approaches should central banks and regulatory and supervisory authorities take to protect the stability of the financial system? monetary policy first, it is necessary for the central bank to take a macroprudential perspective in the conduct of monetary policy. needless to say, the purpose of monetary policy is to contribute to sustainable growth through price stability. looking back at price developments in the past quarter century, inflation gradually declined and it can be said that many central banks have been successful in terms of achieving price stability. however, in terms of financial system stability, the frequency of bubbles and financial crises has increased in the past quarter century, with major episodes including japan ’ s financial crisis following the burst of the bubble, the east asian financial crisis, the credit bubble in the united states and europe, and the recent global financial crisis. moreover, ironically, all these bubbles arose in an environment of low inflation. while the causes of bubbles are complex, one major cause in all cases has been the emergence of a sense, amid continued benign economic conditions of high growth, low inflation, and