york city, but ironically, their action resulted in a significant shortage of liquidity in the nation ’ s financial center. in consequence, short - term interest rates increased rapidly, and the new york money market lost its functionality. the contagious impact was also observed in overseas financial markets such as london. 2 the federal reserve system, which serves as the u. s. central bank, was created by an act of congress on december 23, 1913. for details see robert f. bruner and sean d. carr ( 2007 ), “ the panic of 1907 : lessons learned from the market ’ s perfect storm, ” wiley, john wiley & sons, inc., hoboken, new jersey. bis central bankers ’ speeches in this speech, i will focus on the determinants of the resiliency of a financial system, and the role of regional cooperation in seeking a more stable and resilient system. here, i argue that it is of utmost importance to build a liberalized, transparent, and deep financial market and system, without arbitrary intervention, whether formal or informal. in particular, from an asian regional perspective, i would like to emphasize the need to improve the region ’ s financial infrastructure, including its payment and settlement systems, so that financial markets can maintain their functionality even during a crisis. in the following, i will first review a variety of policy efforts introduced in the region since the asian currency crisis to address the risks related mainly to massive capital outflows. this is followed by my views on how to cope with harmful volatility in the financial market and system. finally, i will conclude by emphasizing the importance of improving payment and settlements systems in the region. 2. successful efforts since the asian currency crisis : but don ’ t be too complacent the more than ten years since the asian currency crisis has literally been a period of reform for asian financial markets. bearing the important lessons in mind, asian authorities have made a variety of policy efforts to strengthen the resilience of their economies and financial markets, including the self - insurance of accumulating foreign reserves, multilateral swap agreements under the “ chiang mai initiative ”, 3 and reduction of their dependency on off - shore short - term funding. they have also endeavored to and succeeded in improving their fiscal positions. coupled with the high growth potential of asian economies, these policy efforts have proved effective in helping asia steer through the global financial crisis, often called the “ financial tsunami ”,

economy is very complicated, and in many cases not fully understood. the famous black box monetary economists talk about. finally, the problem of time inconsistency applies to monetary policy as well. monetary authorities may be tempted to create unexpected inflation to stimulate the economy in the short run. eventually, economic agents will revise their expectations and the result will not be a higher growth rate, but a higher rate of inflation instead. hence, playing the monetary piano is perhaps even more difficult than playing the fiscal violin. fiscal policy co - ordination against this background, let ’ s turn to discussing economic policy co - ordination in the context of emu, starting with the co - ordination of fiscal policies. as i have already argued, playing the fiscal violin is very difficult. by definition, it is even more difficult to prevent fifteen eu fiscal violinists to play out of tune. do my critical observations rule out any co - ordination, at any time? no, under certain special circumstances, fiscal policy co - ordination can be welfare - improving. this assertion is based on a conventional game - theoretical model : fiscal policy - makers maximise independently of each other - a welfare function in which the spillovers of their actions to other players are neglected. the joint welfare of the economies involved increases if fiscal policies are subsequently co - ordinated and policy makers take into account the consequences of their actions on the other players of the game. however, given the caveats mentioned, we have to conclude that the scope for active fiscal policy - making is limited. only in very specific circumstances, the ecofin council should consider the possibility of fiscal policy co - ordination. for instance, when there is a risk of overheating or a common recession, or when the euro area is faced with a persistent balance - of - payments deficit. the basis for the co - ordination of fiscal policies is the multilateral surveillance procedure provided for in article 103 of the ec treaty. in my view, it is possible to elaborate the so - called broad guidelines of the economic policies of the member states, which the ecofin council adopts in conformity with article 103, and include fiscal policy co - ordination. so far, these broad guidelines have been very broad indeed. in the future, they should address individual countries more specifically. when a member state does not comply with the broad guidelines, specific policy recommendations can, and should, be given to the member state concerned. when appropriate, these recommendations should be published. the multilateral surveillance