brought central banks, regulators, and finance ministries together to identify the problems, suggest avenues for addressing those problems, and push for timely solutions. what remains to be done? the process of addressing the problems is still at an early stage. now that the crisis seems to be abating, we can better identify the causes of the crisis and work on finding the best solutions. deficiencies must be fixed on a global basis to forestall gaps and regulatory arbitrage that could undermine the effectiveness of regulation. and countries need to have confidence that others are implementing tighter standards in a consistent way. but at the same time, regulations must be passed and implemented nationally. on one level, this type of action is simply what is required under existing legal structures. on another level, it reflects the reality that taxpayers in individual countries end up bearing much of the cost when home - country institutions need to be stabilized. i'll highlight four of the many areas that require international coordination. first, we need to identify the global risks that can affect local banks. one obvious issue is cross - border exposures, especially when banks in many countries have similar exposures. on a global level, international groups like the financial stability board have an important role to play in looking for these kinds of vulnerabilities. for individual banks that operate across borders, supervisory colleges bring the key supervisors together and can improve the flow of information. these groups can also help raise supervisors'awareness of the risks that occur when the business plans of local banks evolve and shift to take on more global exposures. of course, we shouldn't expect too much from these exercises. in identifying risks, false positives will be common, and some mispricing of assets is inevitable as people attempt to evaluate the implications of broad economic trends and innovations. but looking in a focused way across markets and institutions may help to identify areas where greater supervisory attention could result in a more resilient system. a second area that is likely to involve international collaboration is the development of a more macroprudential approach to supervision and regulation. one aspect of such an approach is higher standards for systemically important institutions ; another is supervisory and regulatory measures to offset procyclical tendencies of the financial sector. formulating higher standards for systemically important, globally active institutions will require international coordination to avoid uneven playing fields. and, offsetting procyclical tendencies presents a difficult question : should authorities aim at damping such tendencies at a global level or at the

find productive uses for the deposit inflows and perhaps face changes in regulatory capital requirements. in addition, liquidity in some markets might be affected ; for example, the incentive for reserve managers to trade federal funds diminishes as the overnight rate falls, probably thinning brokering in that market. in thinking about the costs associated with a low overnight rate, one should bear in mind the message of milton friedman ’ s classic essay on the optimal quantity of money ( friedman, 1969 ). friedman argued that an overnight interest rate of zero is optimal, because a zero opportunity cost of liquidity eliminates the socially wasteful use of resources to economize on money balances. from this perspective, the costs of low short - term interest rates can be seen largely as adjustment costs, arising from the unwinding of schemes designed to make holding transactions balances less burdensome. these costs are real but are also largely transitory and have limited sectoral impact. moreover, to the extent that the affected institutions have economic functions other than helping clients economize on money balances ( for example, if some money market mutual funds have a comparative advantage in lending to commercial paper issuers ), there is scope for repricing that will allow these services to continue to be offered. thus there seems to be little reason for central banks to avoid bringing the policy rate close to zero if the economic situation warranted. a quite different argument for engaging in alternative monetary policies before lowering the overnight rate all the way to zero is that the public might interpret a zero instrument rate as evidence that the central bank has “ run out of ammunition. ” that is, low rates risk fostering the misimpression that monetary policy is ineffective. as we have stressed, that would indeed be a misimpression, as the central bank has means of providing monetary stimulus other than the conventional measure of lowering the overnight nominal interest rate. however, it is also true that the considerable uncertainty that surrounds the use of these alternative measures does make the calibration of policy actions more difficult. moreover, given the important role for expectations in making many of these policies work, the communications challenges would be considerable. given these risks, policymakers are well advised to act preemptively and aggressively to avoid facing the complications raised by the zero lower bound.