In order to outline capital account policy priority, I think policymakers in emerging economies should underline the fact that big market events that pose systemic risks tend to reflect collective mistakes in which most market participants are offside in the same direction. So, to reduce the chance of prolonged financial misalignment with economic fundamentals, the priority for emerging markets may lie in improving the flows and quality of financial information, corporate and public governance, as well as legal infrastructure to allow in different players and views. 6 With players of different views and risk appetites in the market, we have a better chance that the financial system will undergo constant self-correction. Crashes in asset price will also likely be less prolonged and the ensuing economic cost less devastating. 6  See Bannier (2005) for an articulation that large players need not make market responses more aggressive if the market does not uniformly believe that fundamentals are weak. And see Abreu and Brunnermeier (2003) for argument that the resilience of financial bubbles can stem from the inability of arbitrageurs to temporarily coordinate their selling strategies. 4  BIS Review 99/2007  Emerging markets not only require stronger financial intermediaries and better supervisors, but also access to deeper and more liquid capital markets. Our own financial markets may not be deep enough soon enough, but those who are ready for it should not be encumbered from having access to the world financial markets.

It is important to strike a balance between the two by enhancing regulatory and supervisory structures, as this process should by no means result in stymieing competition or economic agents' creative energies. 3. The EU lacks certain institutions. This is clearly pointed out in the De Larosière Report. The chapter focusing on EU supervisory repair proposes a structural reform targeting two areas, namely micro-prudential and macro-prudential supervision. The Report recommends the establishment of the European Systemic Risk Council (ESRC), which should pool and analyse information pertaining to macro-prudential risks and vulnerabilities across all EU financial sectors. The ESRC shall issue risk warnings and shall adopt economic policy recommendations. Another institution proposed in the Report is the European System of Financial Supervision (ESFS), within which the level 3 committees (CEBS, CEIOPS, CESR) will be transformed into three new European Authorities: the European Banking Authority, the European Securities Authority and the European Insurance Authority. These three entities will have wider powers in the licensing and supervision of some specific EU-wide institutions, but it is the strong coordinating role of the ESFS that I want to stress. The fact that the European Systemic Risk Council would be set up under the auspices of the ECB and of the European System of Central Banks would allow it to benefit from the  2  BIS Review 56/2009  analytical capabilities and technical infrastructures developed by central banks in their own monetary and financial stability analyses. This also implies a strong cooperation between the ESFS and the ESRC.