Central banks have provided exceptional support in exceptional circumstances. Now, they need to apply the Lucas critique to their own actions. They need to try and work out what the implications of their actions will be for financial markets in the future. Unless new regulations and a material extension of oversight to the new world of financial intermediation – which the crisis has exposed – are applied in earnest, central bank activism risks fuelling moral hazard in the long run. Provided that financial regulation covers the full breadth and width of financial intermediation, then the new world will likely be one in which the transmission of monetary policy will be stronger, not weaker. Risk aversion will call for more collateralisation. The move away from unsecured to collateralised lending could make overall lending more sensitive to fluctuations in the value of collateral. As monetary policy influences the terms on which these trades are made, its effectiveness will increase. Sovereign debts instruments are likely to continue playing an important role as collateral – both in private lending and in central bank refinancing operations. Central banks should be flexible enough to adapt their instruments to changes to the financial environment. But they  BIS Review 83/2010  7  have to remain inflexible in their overall strategy. In a changing financial environment the only way to maintain credibility is to safeguard the ultimate objective, which is price stability. Thank you for your attention. 8  BIS Review 83/2010
-  We will, however, where appropriate, raise the issue of consolidation in meetings with banks' board of directors and management, and will encourage them to make it part of their strategic planning. -  We will also do what we can to provide appropriate incentives for banks to think seriously about consolidation, in particular by removing potential barriers to competition such as the last remaining controls on interest rates. -  We will not erect artificial barriers to acquisition of local banks by foreign banks, which would be contrary to Hong Kong's traditional free market ethos and our commitments under WTO. -  We note the view that is sometimes expressed that it would be desirable for Hong Kong to retain a core of strong, locally owned banks. This is something that we would support, but it is not something that we can deliver. Rather, it would depend on whether the local banks can agree to merge among themselves. -  We will do what we can to facilitate individual transactions that are put to us for consideration. This will include giving prompt advice on what is acceptable from a banking regulatory point of view. We will also look sympathetically at the use of acceptable debt instruments to finance mergers as opposed to our previous preference for equity or cash. This reflects modern trends in capital management.