A fourth lesson is that policy-makers cannot safeguard domestic financial stability simply by focusing on the safety of their domestic banking system. Policy-makers didn’t fully understand the risks associated with new forms of financial intermediation – complex instruments like collateralized debt obligations. And they didn’t comprehend how interconnected the global financial system had become, and how easily shocks can be amplified and transmitted.
However, for the reasons I have just described, I wish to stress that the DIC should first seek to raise funds through means other than Bank of Japan loans, and make it clear that central bank money can be used only as temporary bridge funds.