 Thank you very much, Francesco. It's always a pleasure to be here back to the ESRB. And to chair the session, and then in a second, you will also see all the panelists in the session on international perspectives of macroprudential policy. I do have a, OK. OK, so let me just give you a very quick overview of where I think the discussion is in terms of international coordination or perspectives of macroprudential policy, but then we actually have a great panel to talk about this issue, so I won't take too much of our time this morning. So where I think that international coordination or the international dimension of macroprudential policy comes in is whenever we talk about spillovers. And the panelists will also pick this up. And now spillovers, in and of itself, is a neutral term for me. So we can have cross-border transmission of policies of shocks and spillovers. And those can be a sign that markets are integrated. So we would naturally expect that if we implement policies in one country or if there are shocks in one country, that that has effects on others. But spillovers can also be a sign of contagion of shocks and I think the challenge that we're all facing is to identify what types of spillovers are we dealing with and also getting a good classification of these spillovers. So do we have externalities? And I think Philippe Bagetta will also argue that it can be positive externalities. So also externalities usually it has somewhat of a negative connotation, but they can also be positive externalities. And then, of course, give rise to the issue should we coordinate our policies across borders. And I think one reason why it's good to be here and good to be here in the ESRB context is that I think the ESRB is actually also a template for international policy coordination. Maybe we'll find out that what we are doing is too complicated in terms of coordination. I will also show you a slide related to the procedures that we're actually implementing. But I think it's at least a model that we have and I think also some of the international discussions would benefit from looking at what the ESRB is doing. But I think, and this is also where we get into this discussion, really what's important is to have good analytical tools to look at spillovers, externalities, however you want to call them, and the tools that we have to actually identify whether we have externalities. Let me skip over this slide, which is just trying to define a bit what I think is a useful way of thinking about policymaking in general, namely to have a structured policy cycle. I think we need to be very structured. And Francesco has just mentioned this, that whenever we activate some policies, some policy instruments, we have to make sure that we actually know why. What's the policy objective? What are indicators we are looking at? And then we are activating instruments. And of course, in the end, we have to look at what we have actually done and whether we've accomplished what we were trying to do. So this is just to give you a little bit of my mindset and our mindset also in the Bundesbank, how we should, in a very structured way, look at policies. So once we have done this, once we have really identified the need for policy intervention and also the degree and the scope of it, we of course have to ask ourselves what's the type of policy coordination we may need. So do we follow this policy cycle that I've just very briefly have described? Do we follow this only at a national level or do we coordinate with other policy areas? And obviously, in particular, in this building, there's also an interesting discussion generally in central banks to what extent should we coordinate monetary policy and macro-prudential policy. And I would argue that the more effective, the risk-taking channels of monetary policy, the more there is a need of macro-prudential policy also to react maybe to monetary policy. And also the effectiveness of macro-prudential policy is obviously plays an important role, I mean, without violating the mandates of each policy area. But these two things have implications for the interaction between monetary policy and macro-prudential policy. Maybe in the discussion, we'll also come to the interaction, which I think is very important in particular when we talk about counter-strategic policies, the coordination between micro-prudential and macro-prudential. All of us who are engaged in these discussions know how difficult it can be sometimes to bring the macro-perspective into prudential policy, which has a very different perspective at the same time it's interesting and challenging. But I think what's the purpose of this particular session is to really talk about the coordination of macro-prudential policies across waters. And as I've argued, we're doing this coordination already in Europe with the ESRB, with the Financial Stability Committee of the ECB. And I think it's interesting to look at how this coordination works and what can potentially be learned. And everybody who's in the process knows that we can always learn, but we have to start at some point. And I think this is what we are doing right now. And maybe at some future point in time, we will also use this as a template for coordination at a more international level. There are discussions about this. The BIS has started discussions about macro-prudential policy coordination in an international context. I don't think we are there yet. Maybe we never want to be at the stage that we have a global ESRB, which is, I mean, the ESRB in and of itself is already challenging. But I think we can learn from the experience that we are currently having. So very briefly, what is happening in Europe, most of you in the room probably are very much aware of the ESRB work and the macro-prudential policies. This is taken from the ESRB database, which is, I think, a very important point. And we need good data on macro-prudential policies and their actual implementation. And what you see here is that more and more countries are using macro-prudential policies. So this is just the number of countries initiating some measures has been increasing over time. This is comparing 2014 to 2016. And there's a rather refined methodology of applying also these measures in a reciprocal way across countries that has been briefly mentioned by Francesco. I don't go into the details here. But this is just to say there are policies being interacted. There is some coordination. And of course, the question is, is this effective? How can the process be improved? And so on. This is just one example, the Estonian systemic risk buffer and how it's been applied across countries, which countries followed the request for reciprocation and which did not. So just very briefly, one of the analytical approaches, I think that we can take to look at, and now I'm coming to the part of policy, effectiveness and actually effects on lending and on other measures, potentially risk. The example is the International Banking Research Network that I've been running together with Linda Goldberg from the New York Fed. And with many, many countries, probably also many representatives of these countries are in the room here, where we're looking at basically policy spillovers. And we use the microdata that are available in the individual central banks to look at policies spillovers. We've done a number of things in terms of spillovers of liquidity risk of unconventional monetary policy and the cross-border effects of macro-prudential policies. And I just want to give you, with one slide, an overview of what we found in this study, which is really, again, trying to do the fourth step in my policy cycle, namely to assess what the effects of policies actually are. And what we find here is that, yes, we do have spillovers of prudential policies. So we actually look at micro-prudential and macro-prudential policies. But it's hard to tell the one story how these instruments spill over. So there's differences across countries, across types of banks, by bank business models, by differences according to the prudential instrument we're looking at. And maybe that's good news. Maybe it's actually a stabilizing feature that not all the countries, all the banks, react in exactly the same way to the same type of policy instrument. But of course, it makes it difficult also to draw a general conclusion in terms of what are spillovers. Are they always positive or negative? I should also say that in this project, we don't distinguish between, we don't try to identify externalities and we just take a very agnostic approach here. What is important is that there's market share repositioning. So obviously, the stronger banks find it easier to deal with a tightening of prudential instruments. And overall, the international spillovers, we look at the effects on loan growth are not very large. So it's not that this is the dominating effect driving loan growth. But there's also lots of other things we don't look at in this project. And maybe that's why we're here to also define a little bit the agenda going forward. So with that, let me just close and say what I think are the questions that maybe we can take a next step towards answering this morning in this session. The first is, I think there's a lot of analytical issues that we still have to deal with if we want to look at policy coordination, policy spillovers. The results that I've just shown to you are basically drawn from micro econometric studies trying to do as good as we can a proper identification of policy effects. And that, of course, means that we have to be very specific with regard to the micro level effects. Now, usually what we're interested in when we look at macro prudential policy and financial stability are the aggregate effects. And so I think Calemney will have part of the answer of how we can go from the micro to the macro. So let me, for the analytical part, maybe stop here. Data are crucial. So that's what we learned in the project that it's not always easy to get the right data on activities on the prudential measure. So in that sense, it's very welcome that the IMF and also the ESRB have data sets on this. And then a number of other issues when it comes to cross-border collaboration. One is, as I've outlined here, the analytical approaches. The second is, do we have a good overview of the studies that have actually been done? And the third is, and I think this is also a bit the purpose of this meeting here, I think we have to have a much more intensive dialogue between policymakers and academia asking for the policymakers to define the questions and also for academia to tell us what are the answers we can potentially get from academia and from theoretical and empirical work. So with that, let me close my introductory remarks and ask the panelists to actually join me here on the panel. I think we can all be up here and then take it in turns. We will have Philippe Bacchetta from the University of Lausanne. And now getting ready for this, I was trying to find out what is HEC Lausanne. I should have checked that before, but yeah. Yeah? I should say it first. OK, OK. And so he will tackle the issues that are just lined out more from a theoretical perspective, if I classify here a little bit. Then we have Shepnam Kalemni-Ushan from the University of Maryland, who will talk about more the empirical aspects of it. And then Jeff Franks from the International Monetary Fund, who's in charge of the European office here, and will, I guess, say a little bit more about the policy aspects of it. But we're just looking forward to the presentations of all three of you. You each have 15 minutes. Philippe will start, and then we should also have sufficient time for discussion here in this group. So thank you very much for being with us. And Philippe would start. OK, so I think the organizers for inviting me to give some thoughts about this issue of international dimensions of macroprudential. So I'm an international macroeconomist and more on the theory side. So my perspective will be very, say, theoretically oriented and probably much more abstract than everything else that you might talk about. So in the international dimension of the macro, in the open economy, macroprudential is particularly useful because it helps stabilizing the economy when you get external pressure, especially when a multi-policy is not enough. On the other hand, macroprudential become, macroprudential become more difficult in the open economy. So I'm going to rely on the existing literature and give a few thoughts related to this literature. I'm not going to do a whole survey, but still there are some interesting aspects. Now, I would say the shortcoming is that this literature is very small. Now, the issue of macroprudential is new. At the macro level, it's also something new. People have started to think about macroprudential in a closed economy, and now they're starting to think about the open economy. So this is something, it's a very young literature. The insights are limited, and I'm going to explain a little bit about that. Now, one question that people ask is, is it useful to coordinate macroprudential policies? In my view, this is too early to answer this question. There are too many aspects that we need to understand to give the answer yes or no. Some people say, oh, there are strong gains for cooperation. Others say, no, no, it's too difficult to cooperate. Some countries will not gain. So I refer to an interesting paper, review paper, by Agenor and Pereira da Silva at the BIS, where they give an overview of all these issues. I'm not going to talk about that. Still, there is the fundamental question, which is to know what are the international speedovers and what are the externalities. If you need to coordinate, it means that national macroprudential is either too much or too little. And I think that's the question. In other words, are the international externalities positive or negative? Talking about externalities, we should distinguish in a closed economy. It is basically externalities that justify, typically, macroprudential. But these are pecuniary or demonic externalities. But what we care about at the international context is whether there is also an international dimension to these externalities. And I think the literature is trying to understand what are these externalities, what are the different speedovers, and different papers go in different directions. And this is where the work has to be done so that we really understand that. And there are different directions. Intuitively, we think that the externality is positive. Because if macroprudential can reduce systemic risk in one country, then this is good for the other countries. So this is a positive speedover. It means that when the country takes its own decision, it does not take into account the positive effect on the other countries. And then it should do more of it. So that would say that there may be too little. But then there are some various papers in the literature that show that you could also have too much of it. And let me give you an example that I think is interesting and is also representative of what is being done in the literature. So I found three papers, at least, that have this result. Vanara, Romay, Jean, and Akari, and Bengi. Where they find that macroprudential may be excessive in a liquidity trap. Why? Because a liquidity trap is typically caused by a situation of excess savings over investment. There's too much net saving. For example, because of strong deleveraging. And now, in a liquidity trap, in a global saving glut, if you want, if you have countries that start to do aggressive macroprudential, they will actually basically leverage even more. So they will reduce net saving even more. So in this paper, they show that such a macroprudential will have a global general equilibrium effect that will even put more pressure on the interest rate and maybe even delay could delay the exit of the zero lower bound and can have negative implications. So in that case, they show that this macroprudential can be excessive. The other examples were of excessive macroprudential. So if advanced economies increase their regulations, this push capital towards emerging markets that may be booming, they may get excessive capital flows. So this would be another negative externality. Now, these effects are quite interesting. These are generally equilibrium effects, but they rely on one assumption, which is that macroprudential is very powerful and impacts the whole economy. And we heard yesterday, and well, of course, you all know that, more than I do. We heard, like Mario Draghi, Philippe Le Plain, talking about leakages, talking about the fact that only some part of the economy are affected by macroprudential. So the macroprudential that is analyzed in international macro model may be too powerful compared to what we find in the data. In particular, there are two types of leakages that are obvious, but we'll see we are not considered. It's the fact that in many cases, macroprudential only apply to residents or macroprudential only apply to banks, or both of these. If it only applies to residents, of course, there is an arbitrage with foreign lenders. And I think this is well known. There is nothing new I can say about that, except advertising an empirical paper I wrote. This is like a diversion from theory. We documented that risky European firms borrowed more from US banks in 2007, 2008. We document that, and our conjecture is that there may have been regulatory arbitrage, because at that time, Basel II was applied in the European Union, but was not applied yet in the US. So this risk-weighted aspect was not yet present. So this is an example of regulatory arbitrage where the European firms maybe lost some market share because of this difference. And this is the type of thing that we have in mind if macroprudential only goes to domestic lenders. So this measures macroprudential only domestic lenders. On the one hand, it can make them safer, but on the other hand, it increases competition for the domestic lenders. So there is a tension, so we can ask whether there is a big impact or any impact on systemic risk. So this is one aspect that should be one type of leakage that should be taken into account in an international macro setup. Many details, you talk about here in this institution. The other aspect is that macroprudential may only apply to banks, but we know that the non-banks could be corporate bonds, shadow banking, et cetera. So here, in that case, macroprudential makes banks more resilient, but we're not sure whether this reduces systemic risk. Actually, to me, this is a big question. Yesterday, there was some discussion about counter-cyclical buffers. Does it have an impact on total borrowing, or is it just a buffer for the banks? And to me, it's a big issue. Now these leakages, either like only banks, only residents, they have not been introduced. They have not been considered in the literature. And I think this is a big weakness, which is why, in my view, it's a bit too early to draw conclusions. In the international macroprudential literature, I've not seen papers on that. I saw a paper, a recent paper, by Bengi and Bianchi, where they have macroprudential with shadow banking, which is an interesting paper. They find that, in their setup, it is still useful to have regulation. And actually, also, that the level of regulation is not affected too much by shadow banking. Because on the one hand, regulation becomes less effective. It only applies to one part of the financial sector. But on the other hand, you have more risk from the non-bank sector. So these two effects, in the end, they offset each other. So the degree of regulation they find is not so much affected by shadow banking. But what we don't know is, what are the international spillovers of that? What are the implications for policy? For sure, if you can only have macro proof for banks, your policy is less effective to stabilize against external shocks. So I know several people who are working on these dimensions right now, as I speak. But I've not seen any paper that deals with this. So I'd like to still make some comments in the thinking about future work. I think this issue here about the banks, whether macro proof has an effect on systemic risk or not, or they just make banks resilient or not, something that I'd like to know from probably from empirical work, we don't know yet. I mean, this is very early. We don't have enough history about that. So as a macro economist, I ask myself, no, is macro proof really macro? Is it banking sector proof only? I think, to me, it's an open question. But it's important to, if we start to understand these international spillovers and externalities and the impact of macro prudential, it is important to know that, to know the answer to this question. Is it just about making the banks safer, or does it have a macro effect? Now, in this perspective, when you have leakages, people argue that you should focus on borrowers. There's people by Jean and Corinek. If you could target directly households and firms, this would be more effective than just targeting banks. There is a recent paper from the Bank of England by Ferrod et al. They look at a loan-to-value ratio for firms and compare this with capital ratios for banks. They find that the capital ratio for banks is no impact on the probability of crisis. It's not useful, while the LTV is very, very effective. And the reason is that in that case, they also have leakages. So capital ratios lead to more financing directly by households to firms. So these are all issues that are interesting, should be explored, and then should be put into the international context. In my last minute, my last thoughts are about emerging markets. Because here we focus on advanced economies. Now, in emerging markets, macro prude traditionally has been relatively easy because of limited capital mobility and a strong banking sector. But this has changed, or this is changing. There is more financial integration. There is disintermigration. So the next seven of them will show us numbers about that. The emerging markets are borrowing more and more outside of the banking sector. So this makes macro prude much more difficult in these countries. One example is a recent paper by Annerd et al. Where they look at the impact of FX regulations on banks, emerging markets. And they find that this is indeed effective for banks. But there is a spillover to the corporate sector. And firms actually then increase their borrowing in foreign currency. So the total effect is limited. So in that case, in this set of countries, it sounds very difficult to, I would say, fill the gaps between banks and non-banks. There's no ESRB in these countries. And maybe it's just simply easier to use capital controls for these other types of capital flows. So my time is up. I conclude. I think from the international macro perspective, we are missing these leakages. They should be introduced in models. We should try to understand that. I'm sure we can make progress. I still see challenges. Something that macro models will have difficulties with are gross positions, which are important. But typically, in macro model, we talk about net positions. So all these issues of gross will raise more difficulties. Thank you. OK, thank you very much. Philippe, that was a very stimulating presentation. And I guess all of us, we have lots of questions or just comments for this discussion that we should could raise. But I suggest that we go on with Shepnam first and then try to see the commonalities, but maybe also differences between the presentation. So you also want to stand up here? I have a microphone that I just need. And I can just, OK. Because I'm going to point to certain things. So I'll just can do it from there. Thank you very much for inviting me. It's a great pleasure to be part of this panel. As Claudia and Philippe mentioned, I'm going to talk about the empirical side of issue to get a better understanding of capital flows, international slovers, and macro-prudential policy. Let me start with what is at the core of this panel. We all know that global financial integration can lead to build up of systemic risk within the financial system. And this within the financial system is a broad concept. You can think this as within the global financial system, within the domestic financial system, and within the financial system of a certain region like Europe. And the key issue here is this happens because of the pro-cyclical nature of the capital flows. So what I would like to focus on three questions under this statement. First is, what are the effects of this process on domestic country financial conditions? So when I say domestic country, I think this as the country on the receiving side of capital flows. And second is, if there are any differences between advanced countries and emerging markets, we have to understand these differences if there are any. And then the third is, what are the implications for macro-prudential policy? You will see that most of my presentation is going to be on the first two because I'm going to argue that very similar to Philippe is the macro-prudential policy academic literature is at its infancy. And the reason for that is actually not we haven't used macro-prudential policies before or macro-prudential policies weren't important before. They have been always used. In fact, by emerging markets, they have been used extensively and they have been understood to be a very critical complement to monetary policy. This was always there. But the academics are the ones actually coming behind, not the policymakers, as in many cases. And the reason why academics coming behind of the policymakers is when you try to model macro-prudential policy, you can only model it as a second best. And as you know, in academic literature, there is a theory bias and we like to model things as optimal first best. We don't like things as second best, but as famously put by Avinash Dixit, the real world is at second best at best. So it is extremely important to understand in that sense. So I celebrate this literature that is its infancy and we are trying to understand theoretically, as Philip already gave you a very nice overview, but why my presentation is going to focus on one and two because to understand theoretical framework, to model a theoretical framework behind the macro-prudential policy and to design better macro-prudential policies in the policy arena, we really have to understand first one and two. You know, how these work, what are the effects, what are the numbers, what are the quantitative impacts, how any given country can deal with this, what are the spillovers? You have to put numbers on these things. If you don't put numbers on these things, you cannot design the macro-prudential policy. That's going to be the key argument of my presentation. Okay, so within this context, I'm going to make four points. The first point and then relate each point to the policy implication. The first point is about gross capital inflows by sector. So we tend to look at the gross capital inflows as a package, how much capital come in a country, out of account, in fact, we used to look at the net concept only. Now we understand that gross concept is extremely important. I'm going to go one step further. I'm going to argue that, you know, capital flows by sector is also very important. But it means is, who is the sector on the receiving side? Is capital flows coming into the banking sector of a country or the corpus of the country borrowing directly or households of the country borrowing directly? This is going to be extremely important, not only from a modeling perspective, as Philip argued, but also to understand the financial stability risk. To correct less as the financial stability risk and that's going to be the key thing when you want to design better macro potential policies. Number two is this point that I made in my first slide about numbers. Numbers meaning aggregate impact. So most of the times we can see things, okay, you know, so when I do this policy, you know, this bank does that, this firm does that. Okay, great. But what is the aggregate impact in the economy? I mean, as you all know and appreciate, it is extremely hard to design macro potential policies to complement the, you know, with monetary policy and to coordinate the across country. So I mean, clearly before, you know, putting that type of effort, we have to know the aggregate impact in a given country. So how important it is? And this really goes through the global financial cycle. Why? Because global financial cycle is what kind of brings together the capital flows or the global level together with what is going on domestically in any given country that is on the receiving side of the capital flows. And to understand the aggregate impact in a country, we have to quantify the impact of global financial cycle on the financial conditions in a given country. My third point is going to be on the role of domestic banks. We already have a lot of work, thanks to pioneering work by Claudia and Linda through the IBR network on the role of global banks, foreign banks. You know, they are very important, but I'm going to argue that domestic banks are also going to be very important. Domestic bank, meaning, you know, the bank operate domestically, doesn't own by any big global banking network or doesn't have any foreign ownership, but as a big role, it's a large bank, has a big role in terms of domestic credit expansion. And I'm going to argue that heterogeneity in this domestic financial intermediation is going to be extremely important because that interacts with capital flows, global financial cycle in a way that transmits the condition. So this is going to be the key to international spillovers and that's going to be important to understand, especially the quantitative role of this heterogeneity to understand to design better macro-potential policies. And the fourth point is going to be in terms of this foreign currency borrowing. As Philip already mentioned, this is something that is more relevant for emerging markets. That's correct, but I believe it's also relevant to a certain extent to the European countries and to certain advanced countries, like New Zealand and Australia. And there's something important here. So generally, how we think this foreign currency borrowing is, well, it is cheaper to borrow in foreign currency, right? I mean, you go and you look at any emerging market you want, you look at, ask their forms, their banks, and you see a huge price differential. So this is of course a very, very big failure of the UIP, uncovered in transparent condition. This is something you already know, it's cheaper, and then they're short-term, they don't think the risk's in the future, they don't hedge and all that. So that's kind of the standard argument. What we were missing is actually, this is cyclical. The interest rate differential between borrowing in foreign currency and the local currency, that differential increases and decreases cyclically moving together with the global financial cycle, with the capital flows. And that's going to be extremely important because that means you can switch between borrowing more in foreign currency or borrowing more in local currency as a function of global financial cycle that immediately connects the whole system together and makes the role of capital flows very important. So, and this is going to be actually a risk that we overlook so far, which is again going, should be part of the macro-potential design. All right, let me detail my point. So what I'm going to show you first is these capital flows by sector. So the way this slide is organized is the top row is going to be advanced economies. The bottom row is going to be emerging markets. Let me just start with the headline statistics. This is going to be actually a big panel. There is going to be over 80 countries here, advance and emerging. And the headline statistics I want you to take away first is when you look at external borrowing of the countries with all the effort we put to make it more FDI, more equity, it is still not it, okay? So on average, the bulk of the external borrowing of a given country on average over time is going to be mostly debt, okay? 60% of the external borrowing is going to be debt. And when you look at this debt, 70% of this debt is going to through bank loans, okay? All these arguments, FDI increase, corporate bond issues increase, sovereign bond, correct. But that's not going to be the bulk, okay? So in that sense, banks are going to be, have a very important role in intermediating capital flows globally. Yes, non-banks are also important. Yes, the bond markets are important, but the line share is still going to go to banks. And this is going to be important when we think these things in an international context. Now, as I said, 70% of the whole debt is going to be bank loans and of course the 30% is going to be bonds. Now, when you, of course, this is an average figure when we go to the details of the advance and emerging. So my pointer is not working, but I'm going to point you to the right graph. So as I said, top row is advanced economies. The first little figure is the debt in advanced economies. And each line is a sector, okay? The red is the bank, blue is the corporate, green is the sovereign, and purple is the central bank. So what you are seeing is, and this is over time, since 1995 till today. And what you see is overall in terms of levels, more than 60% of capital inflows coming into advanced economies is coming to the banking sector, okay? The rest is coming to sovereign sector and the corporate sector as shown by blue and the green. Yes, there's a declining trend, but not that strong. Now, within that debt, again, we are still in the first row, the middle little figure that shows the OID. OID is in the balance of payment jargon is other investment debt. Other investment debt is mostly loans, okay? And the last one is PD, portfolio debt, which is going to be mostly bonds. Now, again, in the emerging market, sorry, advanced economy context, as you see the top line is red, that means most of the loan-based investment, again, coming into the banking sector, this is capital inflows, and only around 20% coming into the corporate and less than that to the sovereign. Now, the last figure for advanced economies, portfolio debt, this is when you look at bonds, this is actually equal, right? Why? Because of course advanced countries have more developed bond markets, so here it is kind of a third, third, third. 30% is coming into the corporate sector, corporate sector borrow in terms of bond issues externally, you know, sovereign issues bond externally and banks also issues bond externally. So that's kind of equal shares. You move to emerging markets, you say drastic difference, okay? In terms of debt overall, actually banking sector, corporate sector and the sovereign sector, in emerging markets have equal shares, right? They externally borrow 30, 30, 30, okay? When you look at this loan versus bond composition in terms of loans, which is the bottom middle of graph, you see that the red line and the blue line is on top of each other, what does it mean? In emerging markets, you know, there are kind of 30, 40% shares, in emerging markets, banking sector, borrowing a lot in terms of loans, that means domestic banks borrowing from foreign banks, this is the cross-border loans and Claudio's work actually, you know, really bring this data to the forefront through IBRN and the green line, the sovereigns, the government sector of the emerging markets, that's less than 20%. Okay, now when you look at the bonds, you see a huge difference, this is the last column and the last figure in the bottom, you see a huge difference between emerging markets and advanced countries. In terms of bonds, portfolio debt, emerging markets, corporates and banks are not that active. Why? Because obviously, you know, these, you really have to be a big bank, a big corporate to be able to go out and issue a bond outside, right? We always hear these like Petrobras, you know, stories and all that, but how many firms are like that in emerging markets? Not that many. And that's going to come back with the aggregate impact. That's going to come back, how the macro-prudential policy has to be told. You see when you think in terms of the bonds, the line share goes to the sovereign, okay? Emerging market sovereigns are still the ones who issue the bond outside and who borrow in terms of debt. So this again gives you the important role of banks for emerging markets, which you can say, well, we already knew that, but banks are also going to have an important role for advanced countries. This is in terms of all external, everything is externally, right? We are trying to understand how capital flowing into what sector. Okay, we can use this data and do a very simple regression to understand the role of the fundamentals versus global factors. So in terms of the capital flows, actually this is very important. When we understand the spillover related to capital flows to the domestic financial conditions, we first have to understand if capital flows coming because of the fundamentals, what does it mean? The country is doing good things, country is growing, policies are right and so forth, and that's going to be captured by GDP growth. So this is going to be a regression of capital flows as you see on the left-hand side, capital flow to GDP ratio, capital flow as a person of GDP. Those little i's and t's means country and time. At the country time level, i is the country. So we are going to regress that on the country's own GDP growth. So this is supposed to capture, I'm a growing country, I'm doing things right. Obviously foreign investors want to come and invest in my country. The other factor as you see is going to be the VIX. This is now pretty much the consensus common global, common factor. Obviously we owe this to the very influential research by Helen Ray and then others follow the Helen's research. We know that VIX is an important global common factor. Although it is a stock market volatility index belongs to the U.S., because it relates to the U.S. monetary policy, it is a global common factor in terms of telling us how capital flows globally moving and how it's allocated. So I'm going to take it as a proxy for the supply side of capital flows. So this regression meant to capture capital flows coming into a country on average because of demand factors, because country is doing something good, country fundamental GDP growth, and because of supply factors, meaning the foreign investors' perceptions, low interest rates in advanced countries, pushing them to emerging markets or vice versa, risky situation in emerging markets, pushing them to advanced countries and so forth. So that's global financial conditions, global common factor is going to be picked up by VIX. What you see in this table is again, the top is advanced economies, the bottom is emerging markets. The first column is just what you would do the first, total capital flows, right? When you regress total capital flows on VIX and GDP growth, you actually get exactly the same result in advanced economies and emerging markets. That first column tells you, look, when GDP growth is up during booms, countries are doing good things, both advanced economies and emerging markets, they do receive capital flows, they're positive coefficient. And there's a negative coefficient on VIX that says when global financial conditions are tight, when there's a lot of uncertainty globally, think 2007, eight, nine crisis, then actually capital retracts generally from everywhere on average, okay? It's a negative coefficient, capital flows up. Now, the interesting pattern here is when you separate these into sectors, so the sovereigns, banks and corporates, every column after the first column, the difference, let me just summarize, so you don't need to go through every number, but the big difference here is, oh, now my pointer's not working. The big difference is the banks and the corporates, so this is the private sector, right? The private capital flows, both in advanced economies and in emerging markets, reacts negatively to VIX. That means low VIX, good global financial conditions, banks and corporates, private sector, receive capital inflows, both in emerging countries and advanced economies, okay? But in terms of growth, there is actually a difference. In emerging markets, when emerging markets do things right, when they demand capital flows, sorry, they actually do receive capital flows. This is a positive question, but their public sector, their sovereign moves counter-cyclically, and this is extremely very important because once you get into these arguments of like global savings clout, you know, is the China saving a lot and that's really coming to the US, you know, Pilip mentioned this, we really have to understand this difference between public and private sector because as you see, that's clearly, you know, Chinese government and not the Chinese private sector, okay, so this is going to be important because our models are not modeling the government sector, our models are about modeling the private sector, okay? And in terms of, you know, advanced economies, you know, when the things are good, as you see capital flows coming to the banking sector and the banking sector intermediates the capital flows. Okay, yeah, let me just, oh, sorry, let me just give you a little quick. Okay, so we'll go very quickly on the different views on the importance of the global financial cycle because this shows you this kind of the role of VIX and then how it relates to the supplies. Now, as I said, the leading view on this is global financial cycle is extremely important. This is first shown by Helen Reats, at her Jackson Hole paper, and then by BIS work by Claudio Boria and Uyunshin and then they are going to argue that there's a key role of VIX and US monitor policy in global banks leverage and intentional capital flows and this is going to imply, as Pilip said, maybe we should think about capital controls and limiting capital mobility, although their conclusion is not just for emerging market for everyone. Now, Claudio's work with Linda actually says it depends because we have to look at the granular data and maybe the cross-border transmission through banks is very strong and that will go with the data I already showed you, but maybe into non-bank lending, into firms and households' private sector, there might be a limited role. And there is also another line of research that says, maybe global financial cycle and the capital flow role in terms of domestic financial conditions is not that important because exchange rates are going to insulate this. The questions that are open here are still, how are the domestic or the conditions are affected and how can we quantify this because the policy is going to respond, both the macro potential policy and the monetary policy. Okay. And here the problem in the empirical research is first, it uses cross-counter capital flows and I already argued that it's important to go more granular to the sector and I'm going to argue next is actually, you have to go even more granular to big data as was argued by Governor Drag yesterday, today by Francesco and also cross-border activity of global banks is not going to be enough because you are going to missing all this domestic policy response and domestic action. Same problem with the VARs or less regressions or the VARs cannot deal with the endogenated flows or the policy response, right? I mean the policy makers neither in emerging markets nor advanced economies, especially the countries that receive a lot of capital flows, they are not just going to sit and wait and do nothing, they are going to respond both exempt and exposed and it's hard for our existing techniques to take this into account and then this is going to be very important because if we want to design the right macro potential, we have to direct the effect on domestic long-growth and the real effects of suppliers, not just in the financial sector, but in the real sector. I have to focus like two pieces of research to give you these numbers that focus on emerging markets. Why is that? Because emerging markets always had this problem, business cycles, credit cycles and capital flows always correlated in emerging markets and most of the time this end up in financial crisis which is why there have been many, many different macro potential policies employed by the emerging markets and because policymakers, they're always told capital flow is a financial step of the risk and monetary policy is not enough, they have to complement monetary policy with macro potential policy. So it's a good laboratory to understand the cause of effect, mechanism and the magnitudes, so can we justify the response of the policymakers? Okay, the findings are going to tell you that the supply side capital flows are very important, so the global financial cycle is going to be important, the numbers are such that you can have up to one percentage point reduction in borrowing costs and you can explain 43% of the actual aggregate, aggregate credit growth by the exogenous capital flows. Bank heterogeneity is going to be extremely important and domestic banks, so the prosycnical agent in the system is going to be domestic banks but which domestic banks, the large international connected domestic banks, these borrow in the international interbank market and then bring that money and intermediate and they are going to be responsible for most of these 43% effect of capital flows on the corporate sector credit growth. Foreign currency borrowing is going to be cheaper on average but during these risk on periods where foreign investors want to invest in emerging markets, actually local currency borrowing is going to be relatively cheaper, which means you have these huge credit booms up to 40, 45% of GDP that is also coming from new locals entering the market. So this is an extremely important dimension of this, generally missed because there's this super emphasis on the foreign currency borrowing, it always sounds like it's always about foreign currency borrowing. No, local currency borrowing is extremely also important and risky firms finance borrowing at lower interest rate and not necessarily their overall. This is very important because this is for deviate from the models that Philip mentioned, the models always think, oh, there's going to be this over borrowing something because of an externality collateral constraint. You're like, why? Because these models are written with the advanced country context. Although therefore open economy, they think capital flows coming directly to the real estate, directly to the land, directly to the assets, increasing the asset values that relaxes the collateral constraint and that externality is going to create all this. Well, if the capital falls coming to the banking sector, borrowing causes actually equally important, even maybe more important than these type of arguments where you really need granular big data to show these things. And this is what this research does. This uses big data, loan data over 100 million loans from several countries. This one particular from Turkey that shows you the result in a picture. This is the QE period in the US in the gray blocks and the VIX in the black line and the borrowing cost, both real and nominal borrowing cost at the granular, at the micro firm level in red and blue that shows you how this moves with the VIX, which means borrowing cost moves with the capital flows and that correlation gets tighter and tighter when the interest rates are really low in advanced countries, capture here with the QE episode. And it's important why because this is a picture from Turkey, but I'm going to show you a general picture from emerging markets too. The emerging markets, banks, firms and households don't borrow externally that much, right? And this shows the banks external borrowing, that is the black line, that's goes up to 40% of GDP. Domestic banks borrow externally, but domestic corporates all in the other axis with the blue line, red line and the purple line, these direct borrowing or corporates is very, very small as a function of aggregate GDP, less than 1%. Not specific to Turkey, all emerging markets do that. As you see, this is the credit share circulated by domestic banks to households and firms in these all these emerging markets, or a overwhelming proportion is by domestic banks, not direct external borrow. So my last slide on the implication for microprudential policies, as I said, the literature is most rhetorical, very little evidence. We really need evidence from the big data and that evidence so far is saying actually it is maybe better to focus on lenders in emerging markets, but advanced countries, as Philip mentioned, households and firms focusing on borrowers is also important. It's very important to understand who is the prostitugal agent, who is the prostitugal sector in a given economy and the evidence so far is saying actually, it's not really through this externals and collateral concept, but it is through borrowing costs. And this is also mentioned in the latest ESRB publication that so much is on the banks and we don't have that much on the non-banks and we need to do more work on that, but the more work on that requires us to understand these mechanisms and the quantity of impact. Okay, thank you very much. Shatnam, for a lot of information, a lot of empirical results, also comparing the advanced economies and the emerging markets. And I think the IMF is also constantly thinking about volatilities, at least in emerging markets as we are seeing some of them now seems to be rather idiosyncratic, what we never know. And so Jeffrey Franks will give us that perspective. So I think my remarks today will be very complimentary with the presentations that we've just heard about because as you can expect, we were very focused on policies and I will concentrate on advanced economies and particularly on European economies in my remarks. I would like to also say that my boss, Paul Thompson was scheduled to speak here and he sends his apologies and his greetings. The focus of my remarks today will be on the role of macro-prudential policies in maintaining financial stability in advanced economies. I'll draw on the work of the IMF in Europe and other selected advanced countries to try to glean some lessons from what we've seen in practice with macro-prudential policy. In this regard, I will also illustrate the role of a range of other policies like tax policy, housing finance and restrictions on land supply that have a strong bearing on the underlying issues that macro-prudential policies typically seek to address. But first, since we're here at the ECB, a brief word on monetary policy to provide some context to the discussion. As I'm sure you all know, the IMF is very supportive of the ECB's current strong accommodation policy which we think should be maintained until inflation is convincingly converging to its objective. And as asset purchases try to close, clear forward guidance is going to be even more important. But there are questions that have been raised in some circles about whether the strongly accommodated monetary policy has caused financial instability. Let me say that our research in the fund suggests that that is not so. We see no generalized financial stability concerns at the current juncture. To be sure, we find that there are some localized pockets of excess. For instance, there are a few euro area countries where house prices are above historical metrics and in some others where they are growing in double digits. And in a few countries, corporate debt relative to GDP is also rising fast. But importantly, these cases are the exception and not the rule. Of course, there are many other markets aside from housing inequity and country-level indicators may be masking some localized bubbles. There is no doubt that policymakers need to remain vigilant to ensure that financial stability risks do not begin to take root. This brings me to the main focus of my remarks on macro-prudential policies to reduce systemic risk. As you know, compared to monetary policy, which is only available at the euro area-wide level, macro-prudential policies can, in principle, closely target risk in specific national markets, thereby contributing to reducing the heterogeneity in financial and business cycles across euro area member states. This is an area where remarkable progress has been made in recent years. We have the European Systemic Risk Board, a European institution that can warn both countries and EU institutions if risks are increasing. Moreover, macro-prudential authorities are now operationally in every member state. And in the euro area, if deemed necessary, the capital-based macro-prudential tools can be topped up by the ECB, which also has macro-prudential responsibilities in addition to its macro-prudential role. This being said, our view is that the EU macro-prudential framework would benefit from some simplification. Procedures to activate macro-prudential instruments are complex, involving many authorities at different levels. A few countries, Austria, Belgium, Finland, Luxembourg, and the Netherlands, were alerted by the ESRB in November 2016 about potential overvaluation in their housing markets and rising household indebtedness. In Austria and Luxembourg, even though legislation for borrower-based tools was introduced, these are yet to be fully used. And in some cases, the activation of capital-based tools took over a year. Let me give you the example of Finland to illustrate this. In response to the ESRB's November 2016 warning on rising household indebtedness, the macro-prudential authority in Finland, FIN FSA, decided to introduce a bank-specific risk weight floor of 15% for residential real estate mortgage loans. The first step in this process was to consult the ECB on the appropriateness and adequacy of the measure. After the ECB signed off on it, FIN FSA started the formal notification process in June 2017 with the European Banking Authority and the ESRB. This part of the process ended in the first week of August of 2017, after both the EBA and the ESRB gave favorable opinions. Next, the measure went to the European Commission, which gave it its no objection in the third week of August. It also decided not to send it up to the council. If the council had been required to give its no objection as well, the process would have been longer and could have entered a political process. The measure was activated on January 3, 2018, for one year. If FIN FSA wants to extend it for another year, it needs to go through that same process again. The recently completed Euro Area FSAP from the IMF suggested that this process should be simplified to provide country authorities with better ability to act in a timely manner. One option would be to enable country authorities to act once the EBA and the ESRB have given their favorable opinion, which should take no more than two months. This would avoid the possibility also of some politicization of the process with the measure going to the EC and the council. Let me move on. As you know, there's a lively debate on the effectiveness of macro-prudential measures. Many skeptics argue that they remain untested and that we are in uncharted territory. We've heard that there's inconclusive academic literature on the theoretical side in this respect. There is also evidence that macro-prudential measures are subject to linkages. We've discussed that both yesterday and this morning. And that they also may become less effective over time due to those linkages as credit shifts to alternative sources. What is our view in the IMF? Our analysis shows that macro-prudential measures targeted towards specific risks work better than instruments that target broad area-wide concerns. But this also means that the toolkit needs to include specific tools, legislated well in advance, so that they can be used when needed. In view of this, it is somewhat problematic that some euro area countries have not yet legislated a full set of borrower-based tools. These countries include Belgium, Germany, Greece, Italy, Malta, Portugal, and Spain. The measures are well-known. Borrower-based caps on loan to value and debt service to income ratios. These are best suited to address specific risks for all institutions, domestic banks, foreign branches, non-bank financial institutions. So the possibility of leakage is relatively low. Ideally, all countries should legislate borrower-based tools with harmonized definitions. Moreover, macro-prudential authorities should be able to tighten these tools for all lending institutions, and they should be applicable to both households and to corporates. Let me comment on these two groups of borrowers. First, focusing on macro-prudential policies to address housing concerns. One of our key findings in this regard is that the underlying issues fueling housing market booms are typically much wider and cannot be addressed by macro-prudential policies on their own. For example, supply constraints often play a role in housing cycles as demographics, urbanization, and income trends outpace construction. Thus, at least in principle, policies to help make the supply of housing more elastic could help. But the case of Spain is cautionary. Here, when more development land was made available, it did not contain the property boom. In these more difficult cases, even more fundamental steps may be needed. They may include tax measures to eliminate biases in favor of ownership and in favor of debt. This points to the importance of ensuring that macro-prudential authorities are able to coordinate with fiscal and other authorities, not least on tax and zoning restrictions that could be distorting property prices. Let me briefly touch on measures that some countries have introduced to deter speculation by investors, such as higher transaction taxes for non-primary residences. Prominent examples here include Australia and Canada. This has been a subject of much debate in and outside of the IMF, and not least because in the IMF's so-called institutional view, measures that differentiate between residents and non-residents are classified as capital flow management measures. And that triggers a certain mechanisms of processes inside the IMF. The case for applying measures specifically aimed at foreign buyers is not clear cut. On the one hand, foreign buyers could be paying in cash or borrowing from foreign financial institutions, which would not increase the local financial stability risks. On the other hand, increasing house prices could make it more expensive for first-time buyers. There are also adverse consequences of fouling house prices on the local market when a real estate boom busts. While there are reasons to be concerned about the participation of foreign buyers in local housing markets, it should be noted that some of the same issues may apply to other buyers, such as domestic speculative investors. Recent IMF research on this issue for Canada shows that non-resident home buyers represent only a small fraction of existing housing stock in places that have been subject to big booms in the real estate prices like Vancouver and Toronto. To the extent that speculators are found to be driving excessive highest price inflation and raising housing affordability concerns, targeting property transfer taxes on all speculative home buyers is a more effective solution than measures aimed solely at non-resident home buyers. This is the practice that has been followed in Hong Kong and in the UK, where buyers of a second home for investment purposes, irrespective of nationality, face higher stamp duties. In contrast, Australia has only applied higher stamp duties to foreign buyers, and recent IMF research has questioned such policies. Given the marginal contribution such buyers have in the speculative demand for housing in Australia. Another lesson regarding housing is that macro-prudential policies should focus on the resilience of households and banks rather than targeting housing prices. The IMF's recent research in this regard shows that macro-prudential measures usually have a lasting, moderating effect on the level of household debt, but only a transitory impact on the level of housing prices. This is also very much in line with a recent experience of Sweden, where amortization requirements and loan-to-value requirements curbed credit growth but had less of an impact on housing prices. Finally on housing, I would also note that this discussion points to the need for national level implementation of at least some macro-prudential instruments. This is indeed the current setup in Europe. Some observers have argued that macro-prudential policies are becoming overly fragmented and need to be consolidated at the central level, but we would suggest caution. There are some good reasons for making sure that some controls are local since they interact in so many ways with various features of the real economy, such as housing markets, zoning, and taxation issues. Besides, local macro-prudential authorities can oversee both bank and non-bank financial intermediaries which are important targets for borrower-based tools. And there is also the asymmetric information aspect to consider. Local regulators have information about local conditions and complex interactions that the center may not have. This does not, of course, mean that the center does not need to play a coordinating role to address inaction bias by local regulators and cross-border spillovers and leakages. So finally, let me turn to the issue of corporate credit. Tools targeting corporate credit need careful design. In the Euro area, only half of corporate loans come from banks. The rest come from non-bank financial sources, including shadow banks for which data is scarce and from other corporates. Moreover, the corporate sector, of course, can access the bond market and still increases indebtedness. Thus, there is considerable potential for leakages that risk rendering the macro-prudential tools ineffective. France is a recent example where macro-prudential measures were introduced to dampen corporate credit growth. In view of rising corporate debt, the French macro-prudential authority has tightened the large exposure limit in big French banks for loans to highly indebted large non-financial corporations. Such measures will protect the banking sector against corporate defaults, if any. At the same time, the counter-cyclical capital buffer requirement on overall credit was increased from 0.25% in view of the rising private sector indebtedness in France. As with housing, macro-prudential tools to target corporate credit need to be supplemented by other measures. For instance, the tax deductibility of interest payments in most corporate income tax systems coupled with no such deductibility for equity financing creates economic distortions and exacerbates leverage. One way to mitigate this debt bias is to provide a deduction for equity costs. Recent IMF work looked at the effect of the Belgian allowance for corporate equity, a tax incentive to raise equity finance, on corporate debt ratios in non-financial firms and banks relative to a control group of similar companies in other countries. It finds that the impact of the Belgian legislation is significant and large. And the debt ratio in Belgium is almost 20 percentage points lower than in the control group of non-financial firms and almost 14 percentage points lower than in the control group for banks. Of course, while such tax measures can be very effective, they need to be carefully designed to address concerns about revenue costs and the potential for tax avoidance. In some cases, rising corporate indebtedness is accompanied by increasing prices in commercial real estate. While bank loans can fuel such price spirals like in Ireland before the global financial crisis, tightening loan to value or debt service to income ratios for corporate collateralized borrowing from all financial entities may work better. Here too, coordination with fiscal authorities is key as changes in tax and depreciation rules could spur commercial real estate booms and busts as the experience of the United States in the 1980s shows. I would urge that EU authorities close data gaps as well in commercial real estate prices to help facilitate regulation in this area. Let me just conclude now. I want to conclude with three essential points here. First, in the Euro area, common monetary policy makes macro-prudential tools even more important than in other jurisdictions. Because of still significant fragmentation, member states will often be at different stages of economic and financial cycles, and the extent of financial accesses will therefore vary across countries. This points to the critical importance of macro-prudential policies. Second, the good news is that the framework that has been set up in the EU is a remarkable achievement. It could benefit from some simplification, as I illustrated earlier, but Europe has come a long way. At the same time, not all countries have yet legislated the borrower-based tools with harmonized definitions that are best suited to target specific risks and limit damages. And third, our experience in the IMF suggests that the problems that macro-prudential policy seeks to address are often caused by other real sector factors and by distortions in other policy areas. So macro-prudential policies cannot be a substitute for addressing those underlying problems. Thank you. Thank you very much for a very rich policy perspective on the issue. I have one question which is too private, and it's a broad one, which I would like to give to the panel, and then I would open up the floor for discussion. So one of the aspects that you all implicitly touched upon, but not very explicitly, is the question when should macro-prudential policy act? And so to what extent is it a forward-looking measure which is trying to identify risks along the way? Or to what extent is this crisis management? To give my perception, it should be rather forward-looking. So it's not a crisis management tool in the strict sense of the word. And that, a related aspect to that is if it's really forward-looking, how targeted should it be? So you said at the end, Jeff, that the very targeted measures are the more effective ones, but can we actually, if we see risks along the way in terms of low interest rates that have led to distorted asset prices, how specific can we actually be? And wouldn't it also be a contradiction in terms of say where we have to be very specific if then we address macro-risk? So this was a bit what Philippe said at the beginning. Maybe we should be targeting different sectors and different types of activities. So these two issues, I think they're a bit related. So how forward-looking should we be and how targeted can we be and how good will our description of the underlying risks actually be? So pick whatever you want of that broad question and maybe Philippe would start and then I would ask Chapnam and then Jeff. Okay, so I think I will focus on the first point about forward-looking or not. I think I was a bit confused myself. So I live in Switzerland and in Switzerland they introduced these counter-cyclical buffers saying that, oh, this will help reducing credit and real estate credit and real estate prices and this would be very, very effective. And so I had this in mind, but then I realized and based on the reading, discussions, et cetera, that well, this may not be so effective and actually this is not so effective. So that initially this idea of these policies was more about controlling aggregate credit, managing the economy. You even said, oh, in the multi-union this could be useful as a complementary tool because some countries may be different parts of the cycle. So there's this idea of macro proof could help. So that's what actually also macro, some many models have incorporated. But now I'm not sure about that. The evidence is not very supportive. So it's more about this forward-looking aspect. Philip Lane was very clear about that, that the counter-cyclical buffers are very useful for facing future crisis, safety of banks for future crisis. So I think it's not yet black and white, yes and no, but this macro management effect of macro proof may be overstated in the literature, but I'd like to know a bit more empirical evidence. It's something that I still have my doubts. Okay, I fully agree with you. I think they should be forward-looking. Crisis management is a total different beast, I think. And this is the essential thing when we think about lower interest rate asset prices, the credit management and all that, because during the crisis, you have to do monetary policy. I mean, this is as Jeremy Stein famous to put it, nothing is like interest rate that goes through all the cracks, right? And that becomes important during crisis, crisis management. So macro proof is supposed to be prudential really deal with the boom period, aggregate credit growth, excessive leverage and all that. So that should be definitely in that sense forward-looking. But then how targeted your second question, this is actually important and sensitive because we do want to somehow curb excessive leverage and credit growth, right? Governor Lane was mentioning this yesterday too, but then where is the line between slowing down aggregate credit growth and aggregate demand management? Actually, this is exactly what I don't like with this theoretical literature because depending on the externality, it can be aggregate demand management or not. And if you look at the IMF critique on emerging markets, they criticize emerging markets that they're saying you use these tools as aggregate demand management and you cannot, right? But then if you criticize emerging markets and not the Switzerland, then that's not good, right? That's these whole problems behind the institutional view and everything. So we have to be very careful. That's why the sectoral dimension is extremely important. Where is the excessive leverage? Who is the post-eclectical agent in the economy? And that's really, I think, what this session is about because when we think this internationally, the link is capital-full, right? And then I think we have to be very careful. I fully agree that the aim here is to curb the excessive leverage and slow down the credit growth, but they can't be used as aggregate demand management tools. So because then there's an issue and BIS has been pushing this a lot because once you get out of this more strong institution advanced context setting to emerge markets, then who is the authority who is in charge of it, right? Is that authority politically independent? Then we have all sorts of questions. So it's important, this targeted question is extremely important, but they should be forwarded. So I think it's unanimous that forward-looking is the way to go here. I think of it very much as a complementary tool to monetary policy itself. And we would never argue for monetary policy to be sort of only in the moment. We always have to be looking forward. And I think you need to do the same thing with your macro-prudential policy. On this issue of targeting, I guess the way I would look at this issue is to think about having, we should have a toolkit that has a full spectrum of tools that range from the most macro to the most micro. And we should be using the right tool for the problem that we are facing. So we should have this ability to sort of move down from more macro to more micro policies. This might mean something of, you could ask yourself the question, in a country like Canada, where there's a huge real estate boom in Vancouver, and in Toronto, but not in the rest of the country, is there some regional specific policies that could help deal with this? And I would also echo the caution in my opening remarks that we can't fix problems with macro-prud that weren't caused by macro-prud. I mean, if we could just harken back, for example, to the problems that led up to the great financial crisis in the United States. We all remember when Alan Greenscrann came out and said, it's not the job of monetary policy to deal with the housing boom. He was actually right, but what he should have been doing is applying macro-prudential policies. And then we also know that that financial crisis was not just a macro-prudential problem, it was a problem with regulatory framework, it was a problem with oversight, it was a problem that had many, many layers to it. Macro-prud would have helped, but it wouldn't fix the problem by itself. Okay, thank you. So we agree that it should be forward-looking, but then the question is, of course, what's the right time to activate, in particular when it goes to the counter-cyclical measures? And then I think it's the debate that we're having right now, and I think in my personal views, it would always be difficult to exactly pinpoint and to define the excessiveness that we have in credit. When does it become a bubble, right? Yeah, yeah. But that would be important also at some point. Of course, also for the IMF, because it immediately raises what are the buffers in the private sector before we have to resort to public safety nets. But let me open the floor for comments, and yes, please, we'll start over there. Let's assume that you have price stability, budget effort is pretty low, but you have a rising external imbalance. And you are an emerging economy. What's been missing in the debate, in my view, is the size of the economy and the role played by reserve money providers, the key central banks. It's not a level playing field and all economies are equal and so on and so on. But let me continue with it. So you have a rising imbalance, external imbalance. And the panelists here are, they say, we don't know about managing aggregate demand. But if monetary policy is not effective, the budget is pretty low. You might even have a budget surplus. And you have a rising external imbalance because of the private sector overboring. What do you do? I mean, and you know at the end of the day, the crash is going to happen, the downturn is going to come. What do you do? I mean, macro potential policy is the main, the main tool in the circumstances. You have to do it. So it's not like, we're tickering on the fringes. Whether we should use it, it's because aggregate demand, we should use only monetary, then we give you a break. What can you do with monetary policy? Under the circumstances. And this is a key issue. And you have to do it. Clearly. I mean, I will ask you very pointedly, in the case of Turkey, there has been enormous overboring. Another issue for debate is the extent of dollarization, of yourization. What do you do? You have the banking sectors in Central and Eastern Europe heavily dominated by foreign groups. What can you do in that? And this is why macro potential policy coordination is essential. If you don't have host and home country regulators seeing eye to eye, I mean, we're going to continue with boom and bust dynamics. And finally, I think one should distinguish between a normal global financial cycle and a drifted one. And here comes the responsibility of the reserve money centers. Okay, thank you. Yes, please, over here. You may want to identify yourself so that. Oh, the remaining central bank, Daniel Thurian. Yeah. Yes, I'm Malcolm Newton from the Central Bank of Iceland. So this is a question about, so what is the envelope of macro proof on one hand and capital control on the others? And because at least the first panel, it's rightly pointed out that in emerging market countries, and I argue it doesn't only apply to emerging market countries, also applies to many small advanced economies like my own and others. Dealing with capital flows in some sense with direct tools can be needed on occasions if you are going to preserve financial stability. So if that is the case, wouldn't the so-called capital flow management tools be part of the macro potential toolkit? And I will tell you a small anecdote on that. In Iceland, we have a special resource requirement on capital flows coming into the bond market and high yielding deposits, because we are growing much faster than other countries with much higher interest rates than the rest of the world, and we were being swamped by capital flows into this due to that. Now, the IMF tend to say, okay, this is capital flow management, the OECD delegation said, we like this tool, you should call it macro proof, and then you are fine. And so there's a question, where is the borderline? I think that, of course, you can't say, you can't deal with it differently by increasing your resilience, so you can live with these capital flows on exchange rate fluctuations, and that is correct, but sometimes it is so much that it becomes very difficult. So if that is the case, I'm asking the panel, so should capital flow management tools therefore be part of the macro potential toolkit, and if that is the case, you all agree that macro proof should be forward-looking, shooting the use of such tools also be at least partly forward-looking. Okay, thank you very much. We can take one more. Let's take the gentleman up here. Yeah. Ah, okay, I didn't, yeah. So I wanted to ask something which has to do with other type of leakages. I wanted to refer to a few episodes which have been important for the life of the secretariat and the SRB in the last months. So we have been pleading for months about introducing, for instance, a counter-cyclical margining and collateral in CCPs, and the reaction has always been, well, you cannot do it because liquidity will move from Europe to New York in the future. It could go to London. We have been trying to think about capital measures for insurance, and the people have been telling us, well, there is not an insurance global capital definition. On investment funds, we have been working a lot on leverage, on liquidity. Of course, the industry says, well, we go to New York in the future, could be London. There is a bit of dismantling of the Dodd-Frank around. So is it possible to do macro-prudential policy even for Europe? I mean, we are big, but maybe we are not big enough. Okay. And so on the other hand, the very back, so if you can be very brief, I will also take you in, but then we give it back to the panel. Thank you. Just like a European systemic risk board, wanted to ask the question with a twist to the euro area. So given the role of capital flows in the euro area, the deeper financial integration seems to, it will bring more prosyclical capital flows among euro area member states. And what macro-prudential policy could do to mitigate this risk? Thank you. Okay, thank you very much. So we have about five minutes. Yeah, so if you decide how you wanna break it up, you don't have to answer all the questions, but just pick whatever you feel is most interesting. So I take it in reverse order, so Jeff would start and Shepard throws in the middle. Maybe I'll jump in on this issue of capital flows management because that's a very interesting and sensitive issue, and it kind of fits in with Daniel's point from the Romanian perspective as well. You know, as you well know, we supported capital controls in Iceland during the crisis. The provocative part of your question is, should we do it in a forward-looking manner? I would say it depends upon what kind of policies you're looking at. There are some that I think could legitimately be considered macro-prudential. And I'll refer to the Romanian case where in the run-up to the crisis, the Romanian central bank made a lot of efforts by putting, say, differential reserve requirements on foreign currency versus domestic currency, had deposit requirements at the central bank for capital inflows. Those types of mechanisms, which have been used not just by Romania, but by Chile and other countries, I think are certainly a legitimate part of the toolbox that could be used in certain circumstances. When you think about using this sort of in a forward-looking manner, I think it's a question of weighing costs and benefits. There are enormous benefits to the world economy of having relatively free capital flows. And doing it in a preemptive manner might cause more cost to the world economy. I think almost certainly it would cost more to the world economy than the benefits would arise. So I would say those types of actual capital type controls might be something that you have to hold only for the crisis situations and not as a standard part of your toolkit. So that would be my view on that. Okay, so the question on Romania and then Turkey. So in fact, the numbers I showed was from Turkey. Let me clarify that. So you of course do things. What you do is you don't wait that the crisis comes, exactly as you say, and these countries actually deviate also from the standard IMF advice during this boom period and they did things. And then these things is a large toolkit and involves things like having different reserve requirement on foreign currency, local currency, interest rate corridor, loan to value. I mean, there were a lot. This is exactly what I was saying. We have a lot to learn from emerging markets experience because emerging markets always have to deal with this problem. They always have this policy dilemma. Every emerging market central banker knows this very well that it's not as easy as in US. Your monetary policy is not just a simple output gap based concept. It is there's an exchange rate concept and there's an output gap concept. And the way interest rate and exchange rate moves is exactly opposite. So during the booms, when you want to reduce the interest rate and the exchange rate go the other way during the bus, when you increase the other way round, reduce the exchange rate, the exchange rate depreciates. So it's very important for emerging markets that they use these things and they deal with this problem all the time. So in these numbers I gave you 43% of the corporate sector credit is because of the capital flows, is based on all these macro-prudential policies they did, all of them. So imagine the counterfactual, right? What would have done if they only did monetary policy which is an inflation targeting framework and did nothing? That would have been maybe 60%, 70%. The macro-prudential policies also involves banning households, borrowing in foreign currency and telling corporates only you can borrow if you're an exporter and if you borrow over a million. So there were a lot already done and even with that you still have this capital flow-related big part of your corporate sector credit growth. So it is extremely important. So I guess the answer is you keep doing these things and even IMF criticizes you as aggregate demand management then you try to not use it as aggregate demand management but use all these different policies as also Jeff said as part of the toolkit. So this relates to the Iceland question. I fully agree that small advanced economies are exactly like emerging markets and I would actually say Southern Europe actually is very much like emerging markets. So again there's a lot to learn from emerging market experience. Now here when you ask then should the capital flow management and macro-prud together to a certain extent yes but I agree with Frank that this is a sensitive issue when you say capital flow management that's a big umbrella. Capital controls is there. A lot of emerging markets actually cannot put capital controls. I mean Turkey for example cannot. They are part of the customs union. OECD countries cannot. So then you go to capital flow management it's not a control it's not a tax but it is these different reserve requirements on you know so then you know how do you define things becomes an issue but the toolkit should be should be large because this is important to do these things in a forward looking manner. Yeah let me stop here and then let's flip to the European questions. No I think. No I cannot go on but I just thought I did the emerging market questions. Now I will go back to this so you said you didn't mention this issue of the capital inflows problem. So of course this is there in the literature something obvious that this is the type of thing you can do with macro-prud. You can stabilize when you have a capital inflows problem because you cannot use your monetary policy. The issue I wanted to raise is that in this context the models are just too simple and then as you mentioned you have the foreign banks you have other foreign investors and that's why we need to understand better these leakages to understand these macro-prud. So this is totally part of the story but I think the analysis should be more subtle than what we currently have. And so this is related to the Iceland case. I think here this is would frame this also with the leakage aspect. So is it impossible to address these issues with other types of macro-prud? So if you want to argue for this capital control you should go, I mean at least conceptually say that no there's something that we cannot do because otherwise it's too easy. You can say oh well, no all these flaws are just introduced capital controls while you could have done maybe more effort in regulation which is being done in the other countries to ask for say like authorization for this capital management be part of macro-prud. I guess this is to be proven that they cannot be, this cannot be done otherwise but other than that I think this was my last slide. It seems to be a natural part of the tools because it seems for small countries much more difficult. So since nobody has answered the question about Europe whether it's too large or too small, I think that from the academic part we don't know. They've seen a couple of papers that show that regulation in the UK has some spillover on the other parts but this is something that is so difficult we don't have evidence on that so this is more like guesses or maybe you can just take risks and see what happens so it would be then interesting to have some experiment to analyze but that's not something we can answer so I think the question is just too difficult at least for. But can I add something on the European question? I actually think you are not, I would answer that question, you are not big enough. This is also the last question. It's an issue for Europe. I mean if you look at the boom period again this is because we focus so much on the crisis and then we kind of lose the sight of how important it is to understand the boom period for the crisis. So why we care about this stuff? We care about this because at the end we care about investment and productivity and if you look at the boom period all this Spain stuff is about capital flows from North Europe to Southern Europe. North Europe is running more current account services. Southern Europe is running current account deficit and that money came to Spain is completely allocated to the wrong firms. That's still a domestic banking sector of the Spain. And then when you these allocated to the wrong firms the investment increase but the product decline and that contributed to product divergence within Europe. At the end this is why we want to do these things forward looking, why we want to curb leverage and credit growth because we know there is going to be this effect on investment and productivity down the line. Now, how you do that? I mean like when you answer okay I'm going to do this counter cyclical thing and I'm going to regulate this well the stuff is going to move fine then the stuff should move maybe. Maybe it shouldn't have flow that much to Spain at the first place. I mean it is important to see this with like the overall Europe or overall global system and what is the domestic intermediaries are doing on place because that's going to be important part of the story. Can I jump in there just a little bit too because this is really the big question, right? I would say a couple of things. First of all, I mean the very question that you're asking it sort of emphasizes the fact that coordination international coordination is absolutely critical to the extent that certain types of financial activity are extremely mobile then your ability to control them in any one jurisdiction becomes less and less, right? The transactions costs are very low the ability to move them is very high. Having said that, if there is a specific borrower in Europe or a lender in Europe you have a legal way of addressing that issue. CCP's is a much more complicated question because the entire activity could be moved offshore and so I think that we have to distinguish there you can use borrower based macro proof measures or lender based macro proof measures as long as they're legally located in your territory but once you've got those types of activities that can move with very low cost all over the world then they're gonna end up in tax havens or they're gonna end up in New York or wherever and that only coordinated actions gonna work in that case. Okay, thank you very much. Like in the real world we get conflicting signals how big our buffers are the clock here says we still have a buffer at the clock up there says we've run into the coffee break so let's stop here. Thanks a lot to the panel and lots of food for thought for the coffee break and thank you all for raising questions.