Also, whereas central banks protect themselves against risk in secured loans by requiring more collateral if conditions deteriorate, an outright purchase is a one-off transaction; there’s no going back to renegotiate the price afterwards. By analogy with the more familiar “LOLR” function, the following thoughts suggest themselves for debate in our community. •  As with LOLR, central banks should only engage in MMLR operations that do not interfere with monetary policy. •  A MMLR should aim to buy at a discount to the fundamental value of a risky asset, with the implicit bid-ask spreads unattractive relative to peacetime conditions in private markets but impliedly better than those available during the crisis itself. The  2  For example see, Buiter W and Sibert A (2007), “The Central Bank as Market Maker of Last Resort”, Maverecon – Willem Buiter’s Blog (http://maverecon.blogspot.com/2007/08/central-bank-as-market-maker-oflast.html). BIS Review 144/2009  3  purchase mechanism should be designed to reveal information about the state of the market and the fairness of prices paid. •  While the risk inherent in outright purchases cannot be avoided, the MMLR absolutely must stay within the capacity determined by its capital resources. •  And crucially, the MMLR should aim to be catalytic, helping ideally to kick-start a market rather than replace it. And it should avoid propping up markets that would not be fundamentally viable once the liquidity crisis subsided. The underlying objective is, as elsewhere, to help to maintain continuity of the crucial services that the financial system provides to the economy.
This growth in intra-regional trade has been spurred, in part, by the integration of production network and supply chain in the region, especially the emergence of China and its integration into the regional economy. Also, government policies to support freer trade through bilateral and multilateral trade agreements have also had a strong supporting influence. Accompanying the growth in intra-regional trade is a deepening process of financial integration in the region, defined as cross-border investment flows within East Asia. Evidence of this can be seen from the data on cross-border flows in FDI, portfolio investment, and bank lending that point to a rising trend. Also, financial prices in the region’s financial markets show greater tendency to converge. For example, cross-border interest rate and bond yield differentials have narrowed while the volatility in money market interest rates across the region has declined. To me, a key stimulus to the current process of financial integration has to be East Asia’s rapid economic growth and the accompanying growths in intra-regional trade and cross-border investment. Government policies to develop financial markets in the region have also been important in so far as helping to provide a clear direction of policy preference towards greater regional integration. As a result, cooperative government efforts to develop regional financial markets, especially the bond and equity markets, are being carried out in many regional fora.