kiyohiko g nishimura : financial regulations – asian perspectives remarks by mr kiyohiko g nishimura, deputy governor of the bank of japan, at the panel session “ financial development and regulatory coordination under new circumstances ”, at lujiazui forum annual meeting 2010, shanghai, 26 june 2010. * * * first of all, i would like to express my sincere gratitude to the hosts for inviting me to the lujiazui forum and especially to this panel on financial reforms. i am particularly delighted to be given the opportunity to discuss the pressing issue of financial reform, which will shape the future landscape of the global economy. in this short presentation, i would like to argue the following two points : firstly, the financial innovations of the past quarter century have blurred the dividing line between banks and non - banks. these developments have made it possible to shift risk back and forth between the banking system and capital markets. it has become difficult to locate exactly where ultimate risk lies, and the banking system has found itself so often vulnerable to the volatility of capital markets. the volcker rule and related financial reform proposals are designed to rectify these problems. secondly, however, we should recognize the significant regional differences in banks ’ business models along this bank / non - bank spectrum. financial reforms should thus follow a carefully - timed and well - balanced approach, taking explicit account of regional and functional heterogeneity. banks more like non - banks and non - banks more like banks : rationale for the volcker rule it may sound a bit farfetched, but the global financial crisis of the last few years might have been brought about partly by banks becoming more like non - banks and non - banks becoming more like banks. some banks are now non - bank - like, as exemplified in the current financial jargon used to describe these banks ’ business practices, such as “ originate to distribute model ” and “ prop trading ”, while some non - banks have become bank - like, as the phrase “ shadow banking system ” suggests. the financial innovations behind these changes are in essence welcome developments, helping to improve efficiency by shifting risk among economic agents. however, they have made it increasingly difficult to locate the whereabouts of ultimate risk. vital information regarding banks ’ risk exposures has been literally “ lost in transformation ” in the originate - todistribute model and various proprietary derivative trades. we have been unable to identify what risks a particular bank has been exposed to, and

##y of banks ’ business functions, especially in the bank / non - bank spectrum. the difference is not arbitrary but reflects real structural differences between regions. in particular, it would be unrealistic to always assume that “ one size fits all ” : we should not put carnivorous lions and herbivorous elephants in the same cage. we should also follow a well - balanced approach that properly recognizes the synergetic cross - effects of item - by - item regulations. an appropriate criterion should be the combined effects of all item - by - item regulations. simply focusing on the “ marginal effects ” of individual measures may be misleading, even though they have good individual rationale. at the same time, we should be aware of a possible trade - off between the long - term benefits and short - term costs of stronger regulations. such regulations may indeed enhance financial stability and economic prosperity in the long run, but the hasty implementation of stringent regulations may hamper a fragile recovery, such as we find ourselves in now. let me stop here for further discussion. thank you for your kind attention.