this is not the focus of my talk but i am happy to return to it in the discussion. in addition, the governance framework for crisis resolution and prevention has been significantly improved. to the surprise of some, the crisis has shown the strength of the political commitment to the integrity of the monetary union. if one compares what exists now and what the framework was six years ago, one can notice the quantum leap that has been achieved. let me elaborate. regarding crisis resolution, member states have put in place mutual insurance mechanisms, most notably the european stability mechanism ( esm ) ; sharing financial risks among sovereign countries is undoubtedly a major political achievement. the esm was created in order to provide financial assistance to euro area countries in financial difficulty. esm interventions are conditional on member states first signing a memorandum of understanding containing a programme for the needed reforms or fiscal consolidation to be implemented in order to restore the financial stability. the reform of eu governance is also about preventing future crises by remedying market and government failures. during the crisis, new safeguards have been established for this purpose : • the fiscal and economic governance framework of the euro area has been reinforced through the adoption of a set of eu legal acts ( the “ six - pack ” and the “ two - pack ” ), as well as the fiscal compact. we have thereby achieved a twofold objective, namely a larger role played by europe in national policies, as well as an internalisation of emu constraints in the domestic frameworks. • the reform of eu governance also aims to prevent future banking crises and break the bank - sovereign nexus. the establishment of the single supervisory mechanism and the adoption of bail - in rules in the bank recovery and resolution directive mark significant progress towards preventing excessive risk - taking and making sure that the taxpayer is last in line to recapitalise banks. but we also need to have robust resolution arrangements at the european level. the single resolution mechanism should thus be able to act swiftly and needs ready access to a resolution fund. i ’ d be pleased to talk more about this in our discussion. bis central bankers ’ speeches overall, significant progress has been achieved : • we are now starting to see the results of these actions to resolve the crisis. sovereign and corporate bond spreads are declining – it ’ s a clear sign that financial fragmentation has started to recede. this is confirmed by target2 balances having decreased by nearly 40 % from their july 2012 peak. rebalancing is also on its way. structural budget

shyamala gopinath : macroprudential approach to regulation – scope and issues paper presented by ms shyamala gopinath, deputy governor of the reserve bank of india, at the asian development bank institute ( adbi ) – central bank of malaysia ( bank negara malaysia / bnm ) conference on macroeconomic and financial stability in asian emerging markets, kuala lumpur, 4 august 2010. * * * 1. explicit pursuit of macroeconomic and financial stability can be said to be the single most significant take away from the recent crisis. more than the specifics, the importance of this mandate lies in decisively effecting a course correction with regard to the approach and philosophy for regulation of the financial system. it is being acknowledged that a macro prudential perspective is critical in designing and pursuing micro prudential regulation of institutions and markets. two distinct but highly inter - related constructs have come to epitomize this post - crisis framework : macro prudential regulation and systemic risk management. both these concepts are philosophically appealing and conceptually sound, but operationally quite challenging. understanding the nuanced interplay between these would be crucial in designing an efficient operative framework for financial stability. systemic risk management 2. systemic risk is a much broader concept implying probability of sudden disruption to a large part of the financial system, reflected in failure of multiple institutions and freezing of markets, triggered by a common shock and propagated through interconnected exposures and correlated positions. any framework for containing systemic risks would need to involve the following elements : strengthening the financial system ’ s resilience to economic downturns and other adverse aggregate shocks sound monitoring of common, correlated exposures among financial institutions arising out of network linkages and developing measures to quantify the contribution of individual institutions to systemic risk minimising the moral hazard associated with failure of systemically important institutions and finding mechanisms to restrict the contagion impact of failing institutions during crisis 3. it is in the above context that the role of macro prudential approach in financial sector policies becomes critical. macro prudential regulation can be considered as one of the tools of this larger policy framework. analytics of macro prudential regulation 4. macro - prudential regulation, as it has come to be generally interpreted, essentially envisages that the key instruments of prudential regulation viz. capital, liquidity and provisioning vary dynamically according to macroeconomic circumstances. the macroeconomic triggers could arise either from the changes