Addressing risks to financial stability

Speech by Mr Jaime Caruana, General Manager of the Bank for International Settlements, to the 49th SEACEN Governors' Conference and High-level Seminar, Kathmandu, Nepal, 21 November 2013.

Regulatory reforms, in particular more capital and new liquidity buffers for banks, have made the financial system more resilient. Nonetheless, regulation typically cannot keep up with the pace of financial innovation. What is to be done? Two measures are suggested. First, supervision should be proactive and keep the systemic risk dimension in clear view. Second, monetary policy could help fill the "cracks" in the regulatory framework and constrain incentives for increased leverage. Finally, the monitoring of bank lending is not enough by itself but needs to be complemented by analysing patterns of financing through capital markets. The substantial recent growth of external bond issuance by Asian firms, usually in dollars, bears close watching.