, thus giving support for a monetary analysis in a forward - looking monetary policy. the analysis of monetary aggregates allows the ecb to identify the longer - term and more persistent trends in inflation. this is the main reason for the monetary pillar in our monetary policy framework. the monetary pillar should not be confused with a “ financial stability pillar ”. monetary analysis is not conducted with the principal goal of detecting financial imbalances. it ultimately rests on the quantity - theoretic notion of there being a reliable link between money and price developments. exploring the link between money and asset prices should be seen as a complementary way of better understanding the role of money. a number of recent studies have demonstrated, in a quite impressive way, that monetary developments – especially when seen in conjunction with credit developments – can also alert policy - makers to unwarranted financial developments and imbalances. needless to say, the financial crisis we have experienced has, in my view, clearly demonstrated the need for policy - makers to have such reliable early warning signals at their disposal. while some parts of the academic literature have long held the view that identifying a bubble in real time is an impossible task, the academic literature on early warning indicator models has made significant progress over the past ten years. research carried out within the bis and the ecb have illustrated that – among other variables, such as price - earnings ratios or price - dividend ratios – simple deviations of money and credit aggregates from a trend that exceed a given threshold are among the few early indicators for ( potentially costly ) boom and bust periods. 9 and one key property that strikes me as being of particular interest for policymakers is the fact that these warning signals emerge well before the alarm bells of standard conjunctural analysis start ringing. the financial crisis and its subsequent shockwaves have also led to recommendations for greater importance to be placed on an approach of “ leaning against the wind ”. according to this approach, monetary policy should be conducted in a “ symmetric ” manner over the financial cycle. more precisely, monetary policy should be more accommodative in times of falling asset prices, but less accommodative during a financial market boom. for instance, the central bank should conduct a slightly tighter monetary policy than warranted by its price stability objective, when the build - up of a potentially detrimental asset price boom has been identified. in so doing, the central bank would better ensure price stability over extended horizons and – at the same

kishori j udeshi : issues in bank regulation and supervision speech by ms kishori j udeshi, deputy governor of the reserve bank of india, at a seminar on global banking : paradigm shift, organised by the federation of indian chamber of commerce and industries, bangalore, 16 september 2004. * * * ficci has been in the forefront of creating a platform for healthy debate and discussion leading to responsible actions. i would like to thank ficci for inviting me to speak at this forum especially as there are several high level functionaries who have travelled great distances to be with us on this occasion. it is a wonderful opportunity and i would certainly use it to explore a few issues at the frontiers of regulation and supervision. some of these are unsettled issues and the raising of issues is essentially with a view to encouraging debate as it is only through debate and dissent that we can aspire to achieve meaningful progress. i would, therefore, stress that the raising of unsettled issues at the frontiers should not be perceived as a statement of an official stance of the reserve bank of india. while much of the issues are raised from an indian perspective, i would also like to glean some thoughts from experience abroad. in recent years the blurring of the distinction between financial intermediaries under the combined effect of domestic and cross - border integration, innovations in instruments and processes, advances in technology and the massive volumes of capital intermediated by the financial system has necessitated a pro - active strengthening of the regulatory and supervisory framework. the financial landscape is increasingly witnessing entry of some of the bigger banks into other financial segments like merchant banking, insurance, etc., which has made them financial conglomerates. emergence of several new players with diversified presence across major segments and possibility of some of the non - banking institutions in the financial sector acquiring large enough proportions to have systemic impact make it imperative for supervision to be spread across various segments of the financial sector. banks have grown organically beyond the national frontiers and spread across the globe. with liberalisation in trade in services, banks are also able to render banking services across territories even without the need for physical presence in those territories. these aspects add other dimensions to the challenges of regulation and supervision of the banking system. recent measures by rbi i would now turn to some of the issues on which the rbi has taken action in the recent period. as part of a move towards greater deregulation, banks fulfilling certain minimum criteria regarding crar and net npas have