In my view, a greater degree of convergence in the underlying regulation which applies to financial institutions and markets will provide us with an excellent basis for making progress on other aspects. Let me refer to some initiatives that have been taken in this respect. Of course, the first initiative that I must mention is that of International Financial Reporting Standards (IFRS). Given the importance of accounting data as the basis of information flows, the development and application of these standards is providing a valuable opportunity to enhance the efficiency and comparability of information, especially on an international basis. Indeed, with effect from 1 January 2005, all EU listed companies have been required by law to use IFRS for their consolidated financial statements. The significance of this development should not be underestimated. It means that market participants and other interested parties should be able to compare and contrast information relating to companies in different jurisdictions on a like-for-like basis, and thereby make more informed decisions. Common accounting standards increase transparency and comparability for investors, thus promoting greater cross border investment. And let me give you a less direct, but nonetheless important example of a regulatory convergence initiative, from my perspective as Chairman of the Basel Committee on Banking Supervision. As you may well be aware, at the end of the nineties, we embarked on a review of the so-called “Basel Accord”, an agreement reached back in 1988 to determine minimum regulatory capital requirements for international banks.

Thus, it is imperative that emerging market devise a proper strategy and process to expedite reforms and develop the financial system. The second long-term reform I want to bring up is on policy institution and framework. On this, two institutions are upmost important for attaining monetary and financial stability. The first is a credible monetary framework that effectively anchors the public’s expectation of inflation. On this, the key issue is the importance of independence and transparency of the monetary policy process. Our view is that lack of independence can come at a great cost in terms of lower central bank credibility and a less favorable trade-off between inflation and output volatility. Likewise, weaknesses in monetary policy transparency can contribute to policy uncertainty and exacerbate the impact of shocks on macroeconomic volatility. The second important policy institution is an effective supervisory policy and domestic financial institution’s capacity for sound risk management. The logic for this is clear. With less effective supervision and limited capacity to manage risk, the ability of the economic system to absorb volatility from global markets is significantly compromised. Reflecting this emerging market has put enormous emphasis on building up the necessary institutions with regards to effective supervision. But the challenges are many. For example, at this time many emerging markets are facing the challenge in implementing Basel II. (i)  Stronger risk management culture  The objective of Basel II is to strengthen the soundness and stability of the banking system through more risk-sensitive capital requirements and rigorous internal risk assessment process.