regard, the assessment criteria concerning credit risks were revised to make clear that they include counterparty risks associated with various financial instruments. before we look to see what the future holds for risk management or supervision, it is essential that bankers and supervisors first make sure that a sound foundation is firmly in place. for supervisors, this foundation is the core principles. current areas of supervisory focus let me now say a few words about weaknesses that came to light during the crisis and which are likely to influence bank supervision in the future. the first of these relates to the need for supervisors to take a broader system - wide approach to regulation and supervision. while strong supervision of individual banking institutions remains essential, supervisors need to devote more resources to understanding interactions among banks as well as between the banking sector and other financial sectors. the basel committee will be exploring the practical ways to implement such a “ macroprudential approach ”. this more comprehensive approach to supervision and regulation will help reduce systemic risk more broadly. it will also enable supervisors to focus their limited resources on those supervisory and regulatory activities that contribute most towards making the domestic banking and regional financial system more resilient to stress. another topic of high interest relates to “ regulatory gaps ”. the crisis has revealed that nondeposit taking institutions could be a major source of systemic risks. the first step for financial sector supervisors is to identify any regulatory gaps in their financial systems. the next is to employ the suitable supervisory response, which may range from traditional prudential tools, such as capital requirements, to enhanced disclosure and transparency. we need to take a fresh look at these issues so that the activity of the unregulated or underregulated players – such as mortgage brokers, mortgage companies, hedge funds or others – are subject to adequate oversight commensurate with their potential to pose systemic risk. this in turn will reduce pressure on the core banking sector and help prevent a lowering of bank standards or practices in good times. the question of whether or to what extent supervision is necessary is a difficult one. to give one example relative to this region, the basel committee has already started to reflect on the supervision of deposit - taking, microfinance institutions. we recognise that some of these institutions may be regulated differently from banks as long as they do not hold, in the aggregate, a significant proportion of deposits in a financial system. but at the same time, these organisations need some form of regulation commensurate to the type and size of their transactions

the view that monetary policy seems to have contributed to the high risk appetite in the financial system and thus to the build - up of financial imbalances. the philosophy of “ mopping up ” after a crisis that prevailed in the years before the great recession has come under attack because it led to the expectation of a dramatic loosening of monetary policy in the event of a financial crisis. such an asymmetric policy, in turn, may itself generate an additional incentive to take on higher risks and thus contribute to financial and macroeconomic instability. 1, 2 hence, some observers argue that price stability and financial stability are so closely intertwined that, in the case of both upturns and downturns, monetary policy has to play an active role in stabilising the financial system. some even call for a dual mandate for central banks, with financial stability on a par with price stability. 3 but in my view, even if monetary policy instruments were an efficient tool to influence financial stability – a premise which i would still doubt – an important argument against the comprehensive involvement of monetary policy in financial stability lies in the risk of losing credibility with regard to the pursuit of price stability. the credibility of monetary policy depends both on the clarity of its objectives and on transparency with regard to its limitations. adopting financial stability as an additional monetary policy objective on a par with price stability would risk raising unrealistic expectations about the effectiveness of the monetary policy instruments. it could create trade - offs which would undermine the primacy of the price stability objective, reflected for instance in the form of an inflationary bias. diamond, d w and r g rajan ( 2012 ), illiquid banks, financial stability, and interest rate policy, journal of political economy 120 ( 3 ), 552 – 591. farhi, e and j tirole ( 2012 ), collective moral hazard, maturity mismatch, and systemic bailouts, american economic review 102 ( 1 ), 60 – 93. tabellini, g ( 2011 ), ez rescue : deja vu all over again, voxeu. org, 27 october 2011. bis central bankers ’ speeches tasking the central bank with both financial as well as price stability might give rise to a timeinconsistency problem. in such a setting, a central bank should find it optimal to deliver the social optimal level of inflation ex ante, but it might not do so ex post. 4 the timeinconsistency