These benefits to financial stability complement the critical role that capital markets play in efficient resource allocation and in reducing overreliance on the banking sector for the mobilization of savings and financial intermediation. Additionally, diversified financial markets provide investors with alternative asset classes in times of financial stress. However, developing such markets is a long-term process that requires proper planning, appropriate prioritization and decisive action in several successive stages. Divert efforts from further development of financial markets Financial markets in EE’s have become more interlinked within the local and global financial systems, but they are still shallow and prone to sudden price movements and greater disruption that may undermine confidence in their integrity. It is therefore important that the ongoing fundamental reforms in emerging financial markets continue and that these longer term priorities are not forgotten as a consequence of predominant focusing on the policy response to the financial crisis and on the accomplishment of the international regulatory reform agenda. In this sense, a decisive action is needed to develop a domestic investor base, address market illiquidity, and improve key aspects of market infrastructure in order to mitigate risks to emerging economies’ financial stability. Ultimately, development of bond markets, money markets and government securities markets is the optimal route for further progress on this front. The assistance of international partners in this area is of a key importance and should not be neglected in conditions of growing challenges of different size and shape on both sides.

Most of the emerging markets do not have deep and developed government securities markets, which imply very limited availability of these assets, as a basis for fulfillment of the liquidity requirements-”highly marketable” which is more restrictive than the eligibility criteria for central bank refinancing operations (and central bank liquidity is the most reliable form of liquidity). The options for investing in foreign securities might be  2  BIS central bankers’ speeches  viable, but at the same time it also increases the exposure to foreign exchange risk. Some of the countries might opt for the central bank placements as an alternative, but this is also seen as a solution, which increases the cost of liquidity and hence, increases the costs of finance. The problem of limited availability of proper assets also holds for corporate bonds, which should have a proper credit rating and certain liquidity features to qualify for the LCR. This is difficult to be fulfilled in countries with thin financial markets, and with sovereign and hence corporate credit rating usually bellow the Basel III requirement. So measures that restrict banks ability to finance bond holdings may hamper the further development of the local capital markets. One remaining issue is the interaction between the LCR and the provision of central bank facilities (The Basel Committee committed to work on this during 2013). – The second “dimension of problems” arises from the calculation of the NSFR that requires shift from short-term to more stable funding of assets and business activities.