For instance, the government could pay the existing banking network on a commercial basis to provide such services. Other parts of the financial system The title of this presentation is “banking reforms”. However, an efficient and stable financial system cannot be founded only on banks. The risks of disruption to the overall economy from a break-down of the banking system are much greater if the banks are dominant than when there also exist other financial institutions and functioning markets. I would strongly encourage you to facilitate the development of other financial market participants such as insurance and pension companies, securities traders, fund management companies etcetera as efficiently functioning markets in various equities and securities. Such diversification will also increase competition and lead to better services at lower prices. Diversified domestic markets also act as a kind of insurance in bad times. Neither should we forget the importance of the financial infrastructure, including payments and settlements systems, exchanges, custodians, etcetera. These provide the necessary “greasing” of the financial system and perform very important roles. Weaknesses in the infrastructure may lead to serious problems, so you must monitor the infrastructure as you will monitor the banks. BIS Review 104/2006  3  Preconditions The development of a modern banking system is dependent on the existence of conducive external factors, often called preconditions. I will now discuss these in some detail. The preconditions include macro economic stability, an adequate legislative framework and a well functioning judicial system.

However, this should not stop an action started by the supervisor to deal with a presumed problem in the bank. The supervisory management and staff must also have reasonable protection should they be sued for their bona fide decisions taken as supervisors. In some countries the supervisors are harassed by frivolous lawsuits by bank owners, managers or other parties. Even if the supervisor is in the end acquitted from any guilt, the process may take years. During this time the supervisor will be severely hampered in performing her job having to concentrate on her defence. Such lawsuits will also reduce the willingness of other supervisors to take necessary supervisory decisions, since they are themselves afraid of being sued. A first line of defence is to take all major supervisory decisions in a collegiate fashion at the top level. Thus only the agency such can be sued as an institution. Nevertheless, should individual supervisors be sued, they must be provided assistance in the court proceedings, such as legal counsel and protection against any costs. Of course, if the supervisor is finally found guilty and have not acted in good faith, the supervisory agency could reclaim any outlays. The second issue is that the supervisors must have a sufficiently large and skilled staff with satisfactory resources. With too few, or not adequately skilled supervisors, bank problems may not be detected early enough which may lead to major crises. With too many supervisors interventions in the banks might become excessive, thus interfering in banks’ daily business.