exchange rates would be impractical ( unless there was a political willingness to establish a single world currency ) and would not be viable without a return to generalised restrictions on capital mobility. capital controls would need to be very pervasive to have any effectiveness, implying prohibitive costs and setting back financial development by several decades. the option of free floating has in theory a number of advantages : i ) it would not require to accumulate reserves to stabilize the exchange rate ; ii ) it would preserve monetary policy autonomy ; iii ) it would protect each country from external monetary shocks ; iv ) markets would enforce an effective and symmetrical discipline on national policies across all countries ; v ) it would avoid imbalances and instability as long as each country maintained its own house in order. the real world is, however, far from the idealized representation of the theory. when the hypotheses of perfectly flexible prices and costless adjustment are abandoned, and we consider the actual working of the financial system in a world of imperfect information and incomplete markets, the presumption that exchange rates will smoothly adjust to reflect changes in fundamentals soon appears unrealistic. in practice, changing market perceptions may make exchange rates volatile and lead them to diverge from fundamentals, especially where markets are thin and uncertainty high, as it is often the case in emerging economies. this experience explains why so many countries have displayed in practice a strong “ fear of floating ”. if we exclude the two “ pure ” exchange rate regimes, the only option available is that of a “ managed ” system based on international cooperation. however, it would be misleading to suppose that the starting point of any reform must be the choice of the exchange rate regime. there are other important features that deeply affect the functioning of the international monetary system : the role and effectiveness of international institutions ; the multilateral surveillance process ; the available mechanisms for creating international reserves ; international trade rules and the mechanism for resolving trade disputes ; and the regulatory framework for international financial markets. not surprisingly, much of the recent discussion in the g20 on how to improve the functioning of the system has centered on these issues. for a detailed review of these issues, see padoa schioppa ( 2010 ). 3. 2 towards an sdr - based international monetary system? before turning to the g20 strategy, i would like to review a proposal by zhou xiaochuan, the governor of the people ’ s bank of china ( zhou, 2009 ). after identifying a fundamental

tarisa watanagase : risk - focused supervision and risk assessment opening address by dr tarisa watanagase, deputy governor of the bank of thailand, at the apec financial regulators training initiative regional seminar on risk - focused supervision and risk assessment, bangkok, 6 september 2004. * * * distinguished guests, ladies und gentlemen, lt is a pleasure for me to be here at the opening of the apec financial regulators training initiative on risk - focused supervision und risk assessment. in making this opening address, i would like to personally extend a warm welcome to all the participants and to express my appreciation to the federal reserve experts who have kindly agreed to share with us their knowledge und experience on risk - based supervision. this regional seminar is held at an opportune time, about two months after the basel committee on banking supervision released the basel ii capital framework. as you all are undoubtedly aware of, basel ii aims to strengthen financial stability by encouraging sound risk management practices at banking organizations. the tools uscd are a more risk - sensitive capital regime ( pillar 1 ) ; the application of risk - based supervision ( pillar 2 ) ; und improved public disclosures to enhance market discipline ( pillar 3 ). of the three pillars, one of the most formidable challenges for emerging market supervisors will be to properly implement the pillar ii risk - based supervisory framework. since risk - based supervision is the main topic of this seminar, it may be useful to provide a few thoughts on some of the broader regulatory und supervisory implications associated with implementing this framework. on the regulatory side, thc adoption of a risk - focused supervisory framework entails a shift away from a rigid, rules based approach to regulation and towards more “ incentive compatible ” prudential standards. by “ incentive compatible ”, i am referring to broad, principles based standards that encourage banks to develop and continuously update their internal risk management systems to ensure that it is commcnsurate with the scope and complexity of its operations. while the benefits are obvious, there are also some consequences for the supervisory side of our business that may not be readily transparent. first, an emphasis an broad prudential standards - while useful rot fostering sound risk management practices - will inevitably create significant challenges for front - line supervisors. this is because they will need to rely much more on sound professional judgment and critical analysis, and less on rules - based compliance criteria, in order to make proper risk assessments. this in turn, will require supervisory staff members to have a fundamental