The central bank deposits held by the national treasury and the domestic financial institutions are then converted to the anchor currency, as are the financial institutions’ domestic assets and liabilities. Technically, this can easily be done, but what comes next? Many of the pros and cons of unilaterally adopting another currency are the same as those pertaining to the euro area: inflation is better anchored and exchange rate risk disappears in trade within the currency area, although independent monetary policy and exchange rate flexibility are relinquished as tools that can be applied in response to economic shocks. The fact that no formal agreements are needed and the process can be concluded swiftly could  BIS central bankers’ speeches  7  be viewed as an advantage over and above negotiated euro area membership. But the lack of a contractual framework embodies many of the disadvantages of this option in comparison with euro area membership or maintaining the domestic currency. The main problem is that the supply of the new currency in the country will fluctuate with capital in- and outflows, while counteractive measures are much more limited than with an independent currency or full euro area membership. For instance, capital outflows could quickly develop into a liquidity problem for the banking system and for treasury financing, which could ultimately lead to default and a financial crisis that the domestic authorities would be unable to stop.
While these measures have merits in safeguarding financial stability, they could have complex and cross-border impact. Even on the monetary policy front, unconventional measures are becoming more conventional. Central banks in the major economies have increasingly used unconventional monetary easing. Though necessary to stabilize their economies at this juncture, these policies have side effects of large and volatile capital inflows into Asia. This further  BIS central bankers’ speeches  1  complicates safeguarding of financial stability in other countries including Asia, and could, in turn, trigger some countries to resort to macroprudential measures themselves. Thus, in terms of policy space, we are dealing with a new paradigm of expanded policy tools, with new transmission mechanism, and requiring their own policy framework and governance. So we need to recognize the need for crossborder coordination as well as flexibility in execution given emerging uncertainty. Turning to the more medium-term structural issues, major regulatory reforms especially Basel III, Financial Stability Board reforms, and Dodd-Frank Act are still a known-unknown. We do know that they are designed to redress weaknesses that caused the crisis by enhancing capital and liquidity, while addressing the problems of procyclicality, and too-big-to-fail of SIFIs. For this, their merits are well recognized. But these reforms will reshape the global financial landscape and raise cost of financial intermediation. They will also have implications for cross-border level playing field, regulatory arbitrage, and alter risk profile of banks.