important lesson is the need to seek external assistance and to adopt corrective policies before problems reach the crisis stage. an early policy response can be more accurately targeted to the underlying causes, and the macro - economic consequences can be less severe. one of the clearest lessons of the experiences both in mexico and in east asia is the role of weaknesses in the financial system in propagating economic disturbances. this is a consequence of the growing integration of international capital markets, and will certainly not be reversed. if anything, markets are likely to be even more closely tied together over time. there are several more specific lessons to be drawn from this recognition. in the first place, liberalisation in the domestic financial system, and in the openness to the world capital market must be accompanied by measures to strengthen prudential regulation and supervision. for those countries that still have capital account restrictions, this means that the dismantling of capital controls will have to be carefully phased and sequenced. it may also mean that existing prudential safeguards, such as liquidity ratios, reserve requirements, exposure limits and controls over currency and maturity mismatches in banks ’ portfolios, may have to be strengthened. [UNK] more generally, however, the recent crisis has revealed that many banking and financial systems continue to embody practices that make them vulnerable. these practices relate to inadequate internal controls, non - transparent accounting standards, weaknesses in loan approval procedures, lax licensing provisions, insufficient capital adequacy requirements, and uncertain closure procedures, among others. because these weaknesses are widespread, and because there was no internationally accepted standard of banking prudence, the basle committee on banking supervision promulgated last year a set of 25 “ core principles ” for banking supervision. implementing these principles should make an important contribution to strengthening banking and financial systems around the world. the core principles represent an important new step in the work of the basle committee. for that reason, i would like to draw your attention both to certain aspects of the philosophy underlying their preparation, and to some of the specific recommendations. in the first place, the core principles are intended to be comprehensive in their coverage. that is to say, they apply to all phases in the life of a bank, from initial licensing, through continuing supervision, through closure procedures for institutions that are unable to meet minimum standards. they are also comprehensive in their institutional scope : they are intended to apply to both domestic and internationally active banks, coming from industrial, emerging and less - developed

index, which marked a year - on - year increase of 1. 6 percent in july, the largest since the latter part of the bubble period. higher crude oil prices are also affecting the cpi through the rise in prices of gasoline and other petroleum - related products. we should also pay attention to the effects of the increase in crude oil prices on economic activity. the steady expansion of the world economy including the united states may be adversely affected. at home, higher crude oil prices may have a negative impact on corporate profits and households ’ spending behavior. conduct of monetary policy let me turn now to the conduct of monetary policy, bearing in mind the current situation in which prices are not increasing together with the economic recovery. the bank has made a commitment to continue the current quantitative easing policy until the year - onyear change in the cpi registers zero percent or higher on a sustainable basis. such a commitment is unusual for a central bank. since the cpi is still on a declining trend, the bank is determined to pursue an easy monetary policy even as the economy continues to recover. the positive impact of the current easy monetary policy on economic activity is strengthening as the economy recovers. the bank ’ s policy commitment allows firms to continue enjoying low funding costs through the stability of expectations about future interest rates. as the economic recovery raises the expected rate of return on new investment with interest rates remaining low, firms will become more inclined to undertake investment. we expect consumer prices to continue declining slightly year on year due to the decrease in rice prices in the fall as a flipside of the increase of last year, despite higher crude oil prices. so far, we have not observed any major changes in the discrepancy between economic activity and prices, productivity, and wages. it is our judgment that we remain at the stage where we should maintain the current commitment and firmly continue the quantitative easing policy. eventually, we must return to the conventional monetary policy of using short - term interest rates as an operating target, from the current policy of using the current account balance at the bank as an operating target. the process of returning to the conventional monetary policy consists of two elements. one element is how to reduce the current account balance at the bank of japan. financial institutions have a legal obligation to hold about 6 trillion yen in the current account at the bank as required reserves. at present, given the ample provision of liquidity by the bank, they are holding 30 to 35 trillion yen in their current accounts, far exceeding the required